Attached files

file filename
EX-32.1 - EXHIBIT 32.1 - MEDICINES CO /DEmdcoex32109302015.htm
EX-31.1 - EXHIBIT 31.1 - MEDICINES CO /DEmdcoex31109302015.htm
EX-10.2 - EXHIBIT 10.2 - MEDICINES CO /DEmdcoex10209302015.htm
EX-31.2 - EXHIBIT 31.2 - MEDICINES CO /DEmdcoex31209302015.htm
EX-10.1 - EXHIBIT 10.1 - MEDICINES CO /DEmdcoex10109302015.htm
EX-32.2 - EXHIBIT 32.2 - MEDICINES CO /DEmdcoex32209302015.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q
(Mark One)
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 2015
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (No Fee Required)
For the transition period from to

Commission file number 000-31191

THE MEDICINES COMPANY
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
 
04-3324394
(I.R.S. Employer
Identification No.)
 
 
 
8 Sylvan Way
Parsippany, New Jersey
(Address of principal executive offices)
 
07054
(Zip Code)

Registrant's telephone number, including area code: (973) 290-6000

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer þ
Accelerated filer o
Non-accelerated filer o
Smaller reporting company o
 
 
(Do not check if a smaller reporting company)
 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No þ
As of November 5, 2015 there were 69,444,101 shares of Common Stock, $0.001 par value per share, outstanding (excluding 2,192,982 shares held in treasury).





THE MEDICINES COMPANY

TABLE OF CONTENTS






Part I. Financial Information
Item 1. Financial Statements

1

THE MEDICINES COMPANY
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
(unaudited)

 
September 30,
2015
 
December 31,
2014
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
508,808

 
$
370,741

Accounts receivable, net of allowances of $20.0 million and $47.0 million at September 30, 2015 and December 31, 2014, respectively
39,715

 
155,691

Inventory, net
114,265

 
81,450

Deferred tax assets

 
33,080

Prepaid expenses and other current assets
24,501

 
16,012

Total current assets
687,289

 
656,974

Fixed assets, net
37,946

 
40,060

Intangible assets, net
1,020,433

 
892,659

Goodwill
313,165

 
286,532

Restricted cash
1,442

 
1,446

Other assets
12,816

 
8,034

Total assets
$
2,073,091

 
$
1,885,705

LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
17,649

 
$
19,799

Accrued expenses
152,301

 
159,252

Current portion of contingent purchase price
68,400

 
210,422

Convertible senior notes
255,047

 

Deferred revenue
36,651

 
14,350

Total current liabilities
530,048

 
403,823

Contingent purchase price
135,907

 
140,712

Deferred tax liabilities
138,807

 
164,459

Convertible senior notes
318,464

 
246,676

Other liabilities
7,600

 
9,944

Total liabilities
1,130,826

 
965,614

Equity component of currently redeemable convertible senior notes (Note 10)
19,953

 

Stockholders' equity:
 
 
 
Preferred stock, $1.00 par value per share, 5,000,000 shares authorized; no shares issued and outstanding

 

Common stock, $0.001 par value per share, 187,500,000 shares authorized; 71,565,394 issued and 69,372,412 outstanding at September 30, 2015 and 125,000,000 authorized; 67,667,468 issued and 65,474,486 outstanding at December 31, 2014, respectively
72

 
68

Additional paid-in capital
1,193,113

 
1,045,078

Treasury stock, at cost; 2,192,982 shares at September 30, 2015 and December 31, 2014, respectively
(50,000
)
 
(50,000
)
Accumulated deficit
(223,801
)
 
(77,109
)
Accumulated other comprehensive income
3,387

 
2,528

Total The Medicines Company stockholders' equity
922,771

 
920,565

Non-controlling interest in joint venture
(459
)
 
(474
)
Total stockholders' equity
922,312

 
920,091

Total liabilities and stockholders' equity
$
2,073,091

 
$
1,885,705

See accompanying notes to unaudited consolidated financial statements.

2

THE MEDICINES COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share amounts)
(unaudited)



 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
Net product revenues
$
48,175

 
$
172,401

 
$
265,163

 
$
533,410

Royalty revenues
24,503

 

 
24,503

 

Total net revenues
72,678

 
172,401

 
289,666

 
533,410

Operating expenses:
 
 
 
 
 
 
 
Cost of product revenue
86,970

 
69,076

 
157,706

 
221,630

Research and development
30,120

 
33,314

 
90,290

 
105,638

Selling, general and administrative
82,477

 
82,662

 
259,257

 
235,928

Total operating expenses
199,567

 
185,052

 
507,253

 
563,196

Loss from operations
(126,889
)
 
(12,651
)
 
(217,587
)
 
(29,786
)
Co-promotion and license income
985

 
2,864

 
10,011

 
16,210

Gain on remeasurement of equity investment

 

 
22,741

 

Gain on sale of investment

 

 
19,773

 

Investment impairment

 
(7,500
)
 

 
(7,500
)
Loss in equity investment

 
(1,184
)
 
(144
)
 
(1,184
)
Legal settlement
5,000

 

 
5,000

 

Interest expense
(9,547
)
 
(3,958
)
 
(27,502
)
 
(11,710
)
Other income (expense)
(137
)
 
(53
)
 
66

 
(24
)
Loss before income taxes
(130,588
)
 
(22,482
)
 
(187,642
)
 
(33,994
)
Benefit for income taxes
25,447

 
5,693

 
40,968

 
7,026

Net loss
(105,141
)
 
(16,789
)
 
(146,674
)
 
(26,968
)
Net (income) loss attributable to non-controlling interest
9

 
53

 
(16
)
 
79

Net loss attributable to The Medicines Company
$
(105,132
)
 
$
(16,736
)
 
$
(146,690
)
 
$
(26,889
)
Basic loss per common share attributable to The Medicines Company
$
(1.57
)
 
$
(0.26
)
 
$
(2.22
)
 
$
(0.42
)
Diluted loss per common share attributable to The Medicines Company
$
(1.57
)
 
$
(0.26
)
 
$
(2.22
)
 
$
(0.42
)
Weighted average number of common shares outstanding:
 
 
 
 
 
 
 
Basic
67,137

 
64,534

 
66,079

 
64,363

Diluted
67,137

 
64,534

 
66,079

 
64,363


See accompanying notes to unaudited consolidated financial statements.


3

THE MEDICINES COMPANY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
(unaudited)


 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
Net loss
$
(105,141
)
 
$
(16,789
)
 
$
(146,674
)
 
$
(26,968
)
Other comprehensive (loss) income:
 
 
 
 
 
 
 
Foreign currency translation adjustment
(1,096
)
 
4,468

 
859

 
5,253

Other comprehensive (loss) income
(1,096
)
 
4,468

 
859

 
5,253

Comprehensive loss
$
(106,237
)
 
$
(12,321
)
 
$
(145,815
)
 
$
(21,715
)

See accompanying notes to unaudited consolidated financial statements.



4

THE MEDICINES COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)

 
Nine Months Ended September 30,
 
2015
 
2014
Cash flows from operating activities:
 
 
 
Net loss
$
(146,674
)
 
$
(26,968
)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
 
 
 
Depreciation and amortization
24,180

 
26,040

Asset impairment charges
29,413

 
22,600

Amortization of long term debt financing costs
1,793

 
985

Amortization of debt discount
15,739

 
7,889

Unrealized foreign currency transaction gain, net
(576
)
 
(887
)
Non-cash share-based compensation expense
23,973

 
24,736

Undistributed loss on equity method investments
144

 
1,184

Loss on disposal of fixed assets
543

 
19

Deferred tax (benefit) provision
(43,393
)
 
1,332

Excess tax benefit from share-based compensation arrangements

 
(1,709
)
Gain on sale of investment
(19,773
)
 

Gain on remeasurement of equity investment
(22,741
)
 

Reserve for excess or obsolete inventory
40,837

 

Adjustment to contingent purchase price
14,423

 
28,731

Changes in operating assets and liabilities:
 
 
 
Accrued interest receivable

 
1

Accounts receivable, net
115,797

 
(17,953
)
Inventory
(57,783
)
 
12,051

Prepaid expenses and other current assets
(7,378
)
 
(3,152
)
Accounts payable
(2,113
)
 
(18,452
)
Accrued expenses
(21,655
)
 
(3,527
)
Deferred revenue
25,161

 
(2,398
)
Contingent purchase price
(49,192
)
 

Other liabilities
(6,186
)
 
(3,278
)
Net cash (used in) provided by operating activities
(85,461
)
 
47,244

Cash flows from investing activities:
 
 
 
Proceeds from sale of fixed assets
250

 

Proceeds from sale of investment
19,773

 

Purchases of fixed assets
(2,421
)
 
(6,080
)
Cash used for acquisitions, net
(28,397
)
 
(58,934
)
Payments for intangible assets
(112,617
)
 
(15,000
)
Other investments

 
(3,625
)
Decrease in restricted cash
61

 
85

Net cash used in investing activities
(123,351
)
 
(83,554
)
Cash flows from financing activities:
 
 
 
Proceeds from issuances of common stock
89,718

 
13,682

Milestone payments
(130,058
)
 

Proceeds from issuance of convertible senior notes
400,000

 

Debt issuance costs
(12,769
)
 

Excess tax benefit from share-based compensation arrangements

 
1,709

Net cash provided by financing activities
346,891

 
15,391

Effect of exchange rate changes on cash
(12
)
 
431

Increase (decrease) in cash and cash equivalents
138,067

 
(20,488
)
Cash and cash equivalents at beginning of period
370,741

 
376,727

Cash and cash equivalents at end of period
$
508,808

 
$
356,239

Supplemental disclosure of cash flow information:
 
 
 
Interest paid
$
6,946

 
$
1,890

Taxes paid
$
89

 
$
1,318

See accompanying notes to unaudited consolidated financial statements.

5



THE MEDICINES COMPANY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

The Medicines Company® name and logo, Angiomax®, Angiox®, Cleviprex®, Carbavance®, Ionsys®, KengrealTM, KengrexalTM, Orbactiv®, PreveLeakTM, RaplixaTM and Recothrom® are either registered trademarks or trademarks of The Medicines Company in the United States and/or other countries. All other trademarks, service marks or other tradenames appearing in this quarterly report on Form 10-Q are the property of their respective owners. Except where otherwise indicated, or where the context may otherwise require, references to “Angiomax” in this quarterly report on Form 10-Q mean Angiomax and Angiox, collectively, and references to "Kengreal" mean Kengreal and Kengrexal, collectively. References to “the Company,” “we,” “us” or “our” mean The Medicines Company, a Delaware corporation, and its subsidiaries.

1. Nature of Business

The Medicines Company is a global biopharmaceutical company focused on saving lives, alleviating suffering and contributing to the economics of healthcare by focusing on leading acute/intensive care hospitals worldwide. The Company markets or has received marketing approval for Angiomax® (bivalirudin), Cleviprex® (clevidipine) injectable emulsion, Ionsys® (fentanyl iontophoretic transdermal system), KengrealTM (cangrelor), Minocin® (minocycline) for injection, Orbactiv® (oritavancin), PreveLeakTM, RaplixaTM (fibrin sealant) and Recothrom® Thrombin topical (Recombinant). The Company also has a pipeline of acute and intensive care hospital products in development, including ABP-700, ALN-PCSsc, Carbavance® and MDCO-216. The Company has the right to develop, manufacture and commercialize ALN-PCSsc under its collaboration agreement with Alnylam Pharmaceuticals, Inc. (Alnylam). The Company believes that its products and products in development possess favorable attributes that competitive products do not provide, can satisfy unmet medical needs in the acute and intensive care hospital product market and offer, or, in the case of its products in development, have the potential to offer, improved performance to hospital businesses.

In addition to these products and products in development, the Company sells a ready‑to‑use formulation of Argatroban and has a portfolio of ten generic drugs, which it refers to as its acute care generic products, that the Company has the non‑exclusive right to market in the United States. The Company is currently selling three of its acute care generic products, midazolam, ondansetron and rocuronium.

On July 2, 2015, the U.S. Court of Appeals for the Federal Circuit (Federal Circuit Court) ruled against the Company in its patent infringement litigation with Hospira, Inc. (Hospira) with respect to the principal U.S. patents covering Angiomax. In its ruling, the Federal Circuit Court held U.S. Patent Nos. 7,582,727 ('727 patent) and 7,598,343 ('343 patent) invalid. As a result, the Company does not have market exclusivity for Angiomax in the United States. In light of such events, in July 2015 the Company entered into a supply and distribution agreement with Sandoz Inc. (Sandoz) under which it granted Sandoz the exclusive right to sell in the United States an authorized generic of Angiomax (bivalirudin). In addition, in July 2015 Hospira's Abbreviated New Drug Applications (ANDA) for its generic versions of bivalirudin were approved by the U.S. Food and Drug Administration (FDA). As a result, Angiomax is now subject to generic competition with the authorized generic and Hospira's generic bivalirudin products. Given the generic competition, the Company has determined to suspend its efforts and expenditures with respect to Angiomax other than for supply chain, quality and safety monitoring and other necessary activities.

On November 3, 2015, the Company announced that it was in the process of evaluating its operations with a goal of unlocking stockholder value. In particular, the Company stated its current intention was to explore strategies for optimizing its capital structure and liquidity position and to narrow the Company’s operational focus by strategically separating non-core businesses and products in order to generate non-dilutive cash and reduce associated cash burn and capital requirements, including, among other things, by potentially divesting or partnering PreveLeak, Raplixa and Recothrom, likely in more than one transaction.
  
2. Significant Accounting Policies

The Company's significant accounting policies are described in note 2 of the notes to the consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2014 as filed with the Securities and Exchange Commission (SEC).
Basis of Presentation
The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all the information and footnotes required by GAAP for complete financial statements. In the opinion of management, the

6



accompanying financial statements include all adjustments, consisting of normal recurring accruals, considered necessary for a fair presentation of the Company's financial position, results of operations, and cash flows for the periods presented.
The consolidated financial statements include the accounts of the Company and its wholly owned and majority owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. The Company records net income (loss) attributable to non-controlling interest in the Company's consolidated financial statements equal to the percentage of ownership interest retained in the respective operations by the non-controlling parties. The Company has no unconsolidated subsidiaries.
The Company's results of operations for the nine months ended September 30, 2015 are not necessarily indicative of the results that may be expected from the Company for the entire fiscal year or any other quarter of the fiscal year ending December 31, 2015. These consolidated financial statements should be read in conjunction with the Company's audited financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2014 as filed with the SEC.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs, expenses and accumulated other comprehensive loss that are reported in the consolidated financial statements and accompanying disclosures. Actual results may be different.
Contingencies
The Company may be, from time to time, a party to various disputes and claims arising from normal business activities. The Company continually assesses litigation to determine if an unfavorable outcome would lead to a probable loss or reasonably possible loss which could be estimated. In accordance with the guidance of the Financial Accounting Standards Board (FASB) on accounting for contingencies, the Company accrues for all contingencies at the earliest date at which the Company deems it probable that a liability has been incurred and the amount of such liability can be reasonably estimated. If the estimate of a probable loss is a range and no amount within the range is more likely than another, the Company accrues the minimum of the range. In the cases where the Company believes that a reasonably possible loss exists, the Company discloses the facts and circumstances of the litigation, including an estimable range, if possible.
In-Process Research and Development
The cost of in-process research and development (IPR&D) acquired directly in a transaction other than a business combination is capitalized if the projects have an alternative future use; otherwise it is expensed. The fair values of IPR&D projects acquired in business combinations are capitalized. Several methods may be used to determine the estimated fair value of the IPR&D projects acquired in a business combination. The Company utilizes the "income method," which applies a probability weighting that considers the risk of development and commercialization to the estimated future net cash flows that are derived from projected sales revenues and estimated costs. These projections are based on factors such as relevant market size, patent protection, historical pricing of similar products and expected industry trends. The estimated future net cash flows are then discounted to the present value using an appropriate discount rate. This analysis is performed for each project independently. These assets are treated as indefinite-lived intangible assets until completion or abandonment of the projects, at which time the assets are amortized over the remaining useful life or written off, as appropriate. These are tested at least annually or when a triggering event occurs that could indicate a potential impairment. Once the research and development efforts are completed, the Company performs an impairment test immediately prior to the change in classification to developed products.
Research and Development

Research and development costs are expensed as incurred. Clinical study costs are accrued over the service periods specified in the contracts and adjusted as necessary based upon an ongoing review of the level of effort and costs actually incurred. Payments for a product license prior to regulatory approval of the product and payments for milestones achieved prior to regulatory approval of the product are expensed in the period incurred as research and development. Milestone payments made in connection with regulatory approvals are capitalized and amortized to cost of revenue over the remaining useful life of the asset.

The Company performs research and development for U.S. government agencies under a cost-reimbursable contract in which the Company is reimbursed for direct costs incurred plus allowable indirect costs. The Company recognizes the reimbursements under research contracts when a contract has been executed, the contract price is fixed and determinable, delivery of services or products has occurred and collection of the contract price is reasonably assured. The reimbursements are classified as an offset to research and development expenses. Payments received in advance of work performed are deferred. The Company recorded

7



approximately $8.7 million and $14.2 million of reimbursements by the government as a reduction of research and development expenses for the three and nine months ended September 30, 2015, respectively, and approximately $3.1 million and $6.0 million for the three and nine months ended September 30, 2014, respectively.

Revenue Recognition

Product Sales.  During the six months ended June 30, 2015, sales of Angiomax in the United States were recognized upon shipment to Integrated Commercialization Solutions, or ICS. With the entrance of generic products and their impact on pricing in the marketplace, the Company is no longer able to reasonably estimate its chargebacks with respect to Angiomax. Accordingly, effective July 1, 2015, sales of Angiomax in the United States are recognized upon shipment by distributors to hospitals as the price of Angiomax is fixed and determinable at that time.

The Company has a supply and distribution agreement with Sandoz under which it has granted Sandoz the exclusive right to sell in the United States an authorized generic of Angiomax (bivalirudin). In accordance with this agreement, the Company receives a royalty based on Sandoz' gross margin, as defined in the agreement, of the authorized generic product sold to hospitals. The Company recognizes royalty revenue on an accrual basis in the period it is reported by Sandoz. During the three and nine month periods ended September 30, 2015, the Company recognized royalty revenue of $24.5 million.

A description of the Company’s revenue recognition policies with respect to certain other products is included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.

Recent Accounting Pronouncements
In May 2014, the Financial Standards Accounting Board (FASB) issued a comprehensive new revenue recognition Accounting Standards Update "Revenue from Contracts with Customers (Topic 606)" (ASU No. 2014-09). ASU 2014-09 provides guidance to clarify the principles for recognizing revenue. This guidance includes the required steps to achieve the core principle that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. On July 9, 2015, the FASB voted and approved to defer the effective date of ASU 2014-09 by one year. As a result, ASU No. 2014-09 will be effective for fiscal years beginning after December 15, 2017, with early adoption permitted but not prior to the original effective date of annual periods beginning after December 15, 2016. ASU No. 2014-09 is to be applied retrospectively, or on a modified retrospective basis. The Company is currently evaluating the impact of adopting ASU No. 2014-09 on its consolidated financial statements and related disclosures.

In April 2015, the FASB issued ASU No. 2015-03, "Interest - Interpretation of Interest (Subtopic 835-35)" which simplifies the presentation of debt issuance costs by requiring debt issuance costs to be presented as a deduction from the corresponding debt liability. This will make the presentation of debt issuance costs consistent with the presentation of debt discounts or premiums. The guidance is effective for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Early adoption is permitted. The Company expects to adopt this guidance when effective and is currently evaluating the effect that the updated standard will have on its consolidated financial statements and related disclosures.

In June 2015, the FASB issued ASU No. 2015-10, “Technical Corrections and Improvements” (ASU No. 2015-10). With regard to fair value measurement disclosures, ASU No. 2015-10 clarified that, for nonrecurring measurements estimated at a date during the reporting period other than the end of the reporting period, an entity should clearly indicate that the fair value information presented is not as of the period’s end as well as the date or period that the measurement was taken. This change was effective immediately upon issuance of ASU No. 2015-10. The adoption of ASU No. 2015-10 did not have a significant impact on the Company's consolidated financial statements and related disclosures.
In July 2015, the FASB issued ASU No. 2015-11, “Inventory 9 (Topic 330) - Simplifying the Measurement of Inventory” (ASU No.2015-11). ASU No. 2015-11 requires an entity to measure inventory at the lower of cost and net realizable value, except for inventory that is measured using the last-in, first-out method or the retail inventory method. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. ASU No. 2015-11 is effective for fiscal years beginning after December 15, 2016 and is to be applied prospectively with early adoption permitted. The Company is currently evaluating the impact of adopting ASU 2015-11 on its consolidated financial statements and related disclosures.
In September 2015, the FASB issued ASU No. 2015-16, “Business Combinations (Topic 805) - Simplifying the Accounting for Measurement-Period Adjustments” (ASU No. 2015-16). ASU No. 2015-16 aims to simplify measurement period adjustments

8



resulting from business combinations by requiring that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of changes to the provisional amounts, calculated as if the accounting had been completed at the acquisition date, will be recorded in the same period’s financial statements as the measurement period adjustment. ASU No. 2015-15 is effective for fiscal years beginning after December 15, 2015, and is to be applied prospectively to adjustments to provisional amounts that occur after the effective date of ASU No. 2015-16. The Company will adopt ASU No. 2015-16 prospectively in the fiscal period beginning after December 15, 2015.
3. Share-Based Compensation

The Company recorded approximately $7.7 million and $24.0 million of share-based compensation expense for the three and nine months ended September 30, 2015, respectively, and approximately $8.4 million and $24.7 million for the three and nine months ended September 30, 2014, respectively. As of September 30, 2015, there was approximately $32.2 million of total unrecognized compensation costs related to non-vested share-based employee compensation arrangements granted under the Company's equity compensation plans. The Company expects to recognize those costs over a weighted average period of 1.43 years.
 
During the nine months ended September 30, 2015, the Company issued a total of 2,953,389 shares of its common stock upon the exercise of stock options, pursuant to restricted stock grants and pursuant to purchases under the Company's 2010 employee stock purchase plan (ESPP). During the nine months ended September 30, 2014, the Company issued a total of 948,773 shares of its common stock upon the exercise of stock options, pursuant to restricted stock grants and pursuant to purchases under the ESPP. Cash received from the exercise of stock options and purchases through the ESPP during the nine months ended September 30, 2015 and September 30, 2014 was $59.8 million and $13.7 million, respectively, and is included within the financing activities section of the accompanying consolidated statements of cash flows.
4. Loss per Share

The following table sets forth the computation of basic and diluted loss per share for the three and nine months ended September 30, 2015 and 2014:

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
 
(in thousands, except per share amounts)
Basic and diluted
 
 
 
 
 
 
 
Net loss attributable to The Medicines Company
$
(105,132
)
 
$
(16,736
)
 
$
(146,690
)
 
$
(26,889
)
 
 
 
 
 
 
 
 
Weighted average common shares outstanding, basic
67,137

 
64,534

 
66,079

 
64,363

Plus: net effect of dilutive stock options, restricted common shares and shares issuable upon conversion of convertible senior notes due 2017

 

 

 

Weighted average common shares outstanding, diluted
67,137

 
64,534

 
66,079

 
64,363

 
 
 
 
 
 
 
 
Loss per share attributable to The Medicines Company, basic
$
(1.57
)
 
$
(0.26
)
 
$
(2.22
)
 
$
(0.42
)
Loss per share attributable to The Medicines Company, diluted
$
(1.57
)
 
$
(0.26
)
 
$
(2.22
)
 
$
(0.42
)


Basic income (loss) per share is computed by dividing consolidated net loss by the weighted average number of shares of common stock outstanding during the period, excluding unvested restricted common shares. The number of potentially dilutive common shares equivalents is calculated using the treasury stock method.

For periods of net income when the effects are not anti-dilutive, diluted earnings per share is computed by dividing the Company's net income by the weighted average number of shares outstanding and the impact of all potential dilutive common shares, consisting primarily of stock options, unvested restricted common stock, shares issuable upon conversion of convertible senior notes due 2017 and 2022 and stock purchase warrants. The number of potentially dilutive common share equivalents is calculated using

9



the treasury stock method. For periods of net loss, diluted loss per share is calculated similar to basic loss per share as the effect of including all potentially dilutive common share equivalents is anti-dilutive.

In August 2015, the Company issued 944,537 shares of its common stock in a private placement. Cash received from the August 2015 private placement totaled $30.0 million and is included within the financing activities section of the accompanying consolidated statements of cash flows. These shares are included in the Company's weighted average number of common stock outstanding.

For the three and nine months ended September 30, 2015, options to purchase 1,737,569 shares and 1,454,852 shares, respectively, of common stock that could potentially dilute basic loss per share in the future were excluded from the calculation of diluted earnings per share as their effect would have been anti-dilutive. For the three and nine months ended September 30, 2014, options to purchase 1,280,612 shares and 1,611,940 shares, respectively, of common stock that could potentially dilute basic loss per share in the future were excluded from the calculation of diluted loss per share as their effect would have been anti-dilutive.

For the three and nine months ended September 30, 2015, there were 257,819 and 264,206 shares, respectively, of unvested restricted stock excluded from the calculation of diluted loss per common share as their effect would be anti-dilutive. For the three and nine months ended September 30, 2014, there were 252,943 and 286,867 shares, respectively, of unvested restricted stock excluded from the calculation of diluted loss per share.

In January 2015, the Company issued, at par value, $400.0 million aggregate principal amount of 2.5% convertible senior notes due 2022 (the 2022 Notes) (see note 10, Convertible Senior Notes). The conversion rate for the 2022 Notes was initially, and remains 29.8806 shares of the Company’s common stock per $1,000 principal amount of the 2022 Notes, which is equivalent to an initial conversion price of approximately $33.47 per share of the Company’s common stock. For the three and nine months ended September 30, 2015, the number of shares issuable upon conversion and excluded from the calculation of diluted loss per share was 555,859 and 185,286, respectively.

In June 2012, the Company issued, at par value, $275.0 million aggregate principal amount of 1.375% convertible senior notes due June 1, 2017 (the 2017 Notes) (see note 10, Convertible Senior Notes). In connection with the issuance of the 2017 Notes, the Company entered into convertible note hedge transactions with respect to its common stock (the 2017 Note Hedges) with several of the initial purchasers of the 2017 Notes, their affiliates and other financial institutions (the 2017 Hedge Counterparties). The options that are part of the 2017 Note Hedges are not considered for purposes of calculating the total shares outstanding under the basic and diluted net income per share, as their effect would be anti-dilutive. The 2017 Note Hedges are expected generally to reduce the potential dilution with respect to shares of the Company's common stock upon any conversion of the Notes in the event that the market price per share of the Company's common stock, as measured under the terms of the 2017 Note Hedges, is greater than the strike price of the 2017 Note Hedges, which initially corresponded to the conversion price of the 2017 Notes and is subject to anti-dilution adjustments substantially similar to those applicable to the conversion rate of the 2017 Notes. The number of shares of common stock issuable upon conversion of the 2017 Notes and excluded from the calculation of diluted loss per share for the three and nine months ended September 30, 2015 was 2,011,844 and 689,195, as their effect would be anti-dilutive.

In addition, in connection with the 2017 Note Hedges, the Company entered into warrant transactions with the 2017 Hedge Counterparties, pursuant to which the Company sold warrants (the 2017 Warrants) to the Hedge Counterparties to purchase, subject to customary anti-dilution adjustments, up to 9.8 million shares of the Company's common stock at a strike price of $34.20 per share. For the three and nine months ended September 30, 2015, the shares of common stock issuable upon the exercise of the warrants excluded from the calculation of diluted loss per share was 253,146 and 84,382. The 2017 Warrants will have a dilutive effect with respect to the Company's common stock to the extent that the market price per share of the Company's common stock, as measured under the terms of the 2017 Warrants, exceeds the applicable strike price of the 2017 Warrants. However, subject to certain conditions, the Company may elect to settle all of the 2017 Warrants in cash.

5. Income Taxes

For the three months ended September 30, 2015 and 2014, the Company recorded a $25.4 million benefit and a $5.7 million benefit for income taxes, respectively, based upon its estimated federal, state and foreign realizable tax benefits for the year. The worldwide effective income tax rates for the Company for the three months ended September 30, 2015 and 2014 were 19.5% and 25.3%, respectively. This decrease in effective tax rates was primarily driven by a projected loss for the year 2015 and a discrete tax benefit related to a partial release of a valuation allowance related to Dutch net operating losses associated with ProFibrix B.V. as a result of the regulatory approvals of Raplixa in both the United States and European Union, which were offset by the establishment of a valuation allowance against certain deferred tax assets including portions of projected 2015 losses, an increase in foreign taxable income, and an increase in the non-cash tax impact arising from changes in the value of contingent consideration under the Company's agreements for the acquisitions of Targanta Therapeutics Corporation

10



(Targanta), Incline Therapeutics, Inc. (Incline), ProFibrix B.V. (ProFibrix), Rempex Pharmaceuticals, Inc. (Rempex),Tenaxis Medical, Inc. (Tenaxis) and Annovation BioPharma, Inc. (Annovation).

For the nine months ended September 30, 2015 and 2014, the Company recorded a $41.0 million benefit and a $7.0 million benefit for income taxes, respectively, based upon its estimated federal, state and foreign realizable tax benefits for the year. The worldwide effective income tax rates for the Company for the nine months ended September 30, 2015 and 2014 were 21.8% and 20.7%, respectively. This increase in the effective tax rate is primarily due to the establishment of a valuation allowance against certain deferred tax assets including portions of projected 2015 losses, an increase in foreign taxable income, and an increase in the non-cash tax impact arising from changes in the value of contingent consideration related to the Company's acquisitions of Targanta, Incline, ProFibrix, Rempex, Tenaxis and Annovation, offset primarily by a discrete tax benefit related to a partial release in a valuation allowance related to Dutch net operating losses associated with ProFibrix B.V. as a result of the regulatory approvals of Raplixa in both the United States and European Union.


According to the standards of Accounting Standards Codification ("ASC") 740, the Company considers all available evidence, both positive and negative, to determine whether, based on the weight of that evidence, a valuation allowance is needed to reduce its deferred tax assets to the amount that is more likely than not to be realized. During the three months and nine months ended September 30, 2015, the Company placed significant weight on the following pieces of negative evidence in recording valuation allowances on certain of its deferred tax assets as of September 30, 2015:

The Company expects to be in a cumulative net book loss for the three-year period ending December 31, 2015 as Angiomax faces generic competition in the U.S. due to the July 2, 2015 decision by the Federal Circuit Court which held the ‘727 patent and ‘343 patent invalid.
The commercial success of the Company's marketed and approved products is not assured.





The Company will continue to evaluate its ability to realize its deferred tax assets on a periodic basis and will adjust such amounts in light of changing facts and circumstances including, but not limited to, future projections of taxable income, tax legislation, rulings by relevant tax authorities, the progress of ongoing tax audits and the regulatory approval of products currently under development. Any additional changes to the valuation allowance recorded on deferred tax assets in the future would impact the Company's income taxes.

6. Cash and Cash Equivalents

The Company considers all highly liquid investments purchased with original maturities at the date of purchase of three months or less to be cash equivalents. Cash and cash equivalents included cash of $502.8 million and $364.7 million at September 30, 2015 and December 31, 2014, respectively. Cash and cash equivalents at September 30, 2015 and December 31, 2014 also included at both dates investments of $6.0 million in money market funds with original maturities of less than three months.


Restricted Cash

The Company had restricted cash of $1.4 million at September 30, 2015 and $1.4 million at December 31, 2014, which included at both dates a $1.0 million outstanding letter of credit associated with the Company's lease for the office space in Parsippany, New Jersey. The funds are invested in certificates of deposit. The letter of credit permits draws by the landlord to cure defaults by the Company. In addition, as a result of the acquisition of Targanta in 2009, the Company had restricted cash of $0.1 million at September 30, 2015 and $0.1 million at December 31, 2014, in the form of a guaranteed investment certificate collateralizing an available credit facility. The Company also had restricted cash of $0.3 million at September 30, 2015 and $0.3 million at December 31, 2014, related to certain foreign tender requirements.

7. Fair Value Measurements

FASB ASC 820 “Fair Value Measurements and Disclosures” provides a framework for measuring fair value under GAAP and requires expanded disclosures regarding fair value measurements. ASC 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or

11



liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs, where available, and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

Level 1
Quoted prices in active markets for identical assets or liabilities. The Company's Level 1 asset consists of money market investments. The Company does not have Level 1 liabilities as of September 30, 2015 or December 31, 2014.
Level 2
Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. The Company does not have Level 2 assets or liabilities as of September 30, 2015 or December 31, 2014.
Level 3
Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. The Company's Level 3 liabilities consist of the contingent purchase prices associated with the Company's business combinations. The fair value of certain development or regulatory milestone based contingent purchase prices was determined in a discounted cash flow framework by probability weighting the future contractual payment with management's assessment of the likelihood of achieving these milestones and present valuing them using a risk-adjusted discount rate. Certain sales milestone based payments were determined in a discounted cash flow framework where risk-adjusted revenue scenarios were estimated using Monte Carlo simulation models to compute contractual payments which were present valued using a risk-adjusted discount rate.

The following table sets forth the Company's assets and liabilities that were measured at fair value on a recurring basis at September 30, 2015 and December 31, 2014 by level within the fair value hierarchy. As required by ASC 820, assets and liabilities measured at fair value are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company's assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability:

 
As of September 30, 2015
 
As of December 31, 2014
Assets and Liabilities
Quoted Prices In
Active Markets for Identical Assets
(Level 1)
 
Significant Other Observable Inputs
 (Level 2)
 
 
Significant
Unobservable
Inputs
 (Level 3)
 
Balance as of September 30, 2015
 
Quoted Prices In
Active Markets for Identical Assets
(Level 1)
 
Significant Other Observable Inputs
 (Level 2)
 
Significant
Unobservable
Inputs
 (Level 3)
 
Balance as of December 31, 2014
 
(in thousands)
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Money market
$
6,032

 
$

 
$

 
$
6,032

 
$
6,030

 
$

 
$

 
$
6,030

Total assets at fair value
$
6,032

 
$

 
$

 
$
6,032

 
$
6,030

 
$

 
$

 
$
6,030

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Contingent purchase price
$

 
$

 
$
204,307

 
$
204,307

 
$

 
$

 
$
351,134

 
$
351,134

Total liabilities at fair value
$

 
$

 
$
204,307

 
$
204,307

 
$

 
$

 
$
351,134

 
$
351,134


The Company measures contingent purchase price at fair value based on significant inputs not observable in the market, which causes it to be classified as a Level 3 measurement within the fair value hierarchy. The valuation of contingent purchase price uses assumptions and estimates the Company believes would be made by a market participant in making the same valuation. The Company assesses these assumptions and estimates on an on-going basis as additional data impacting the assumptions and estimates are obtained. Changes in the fair value of contingent purchase price related to updated assumptions and estimates are recognized within selling, general and administrative expenses in the accompanying consolidated statements of operations.

Contingent purchase price may change significantly as additional data is obtained, impacting the Company’s assumptions regarding probabilities of successful achievement of related milestones used to estimate the fair value of the liability. In evaluating this information, considerable judgment is required to interpret the market data used to develop the assumptions and estimates.

12



The estimates of fair value may not be indicative of the amounts that could be realized in a current market exchange. Accordingly, the use of different market assumptions and/or different valuation techniques may have a material effect on the estimated fair value amounts, and such changes could materially impact the Company’s results of operations in future periods.
Level 3 Disclosures
The following table provides quantitative information associated with the fair value measurement of the Company’s Level 3 inputs:

 
 
Fair Value as of
 
 
 
 
 
 
 
 
September 30, 2015
 
Valuation Technique
 
Unobservable Input
 
Range
(Weighted Average)
 
 
(in thousands)
 
 
 
 
 
 
Targanta:
 
 
 
 
 
 
 
 
Contingent purchase price
 
$
5,707

 
Probability-adjusted discounted cash flow
 
Probability of success
 
20%
 
 
 
 
 
 
Period in which milestone is expected to be achieved
 
2020
 
 
 
 
 
 
Discount rate
 
11%
Incline:
 
 
 
 
 
 
 
 
Contingent purchase price
 
$
78,000

 
Probability-adjusted discounted cash flow
 
Probabilities of success
 
64% -100% (86%)

 
 
 

 
Periods in which milestones are expected to be achieved
 
2015 - 2018

 
 
 
 
 
Discount Rate
 
18%
ProFibrix:
 
 
 
 
 

 
 
Contingent purchase price
 
$
2,400

 
Probability-adjusted discounted cash flow
 
Probabilities of success
 
5% - 15% (14%)

 
 
 
 
 
Periods in which milestones are expected to be achieved
 
2019

 
 
 
 
 
Discount rate
 
27% - 29%
Rempex:
 
 
 
 
 

 
 
Contingent purchase price: commercial milestone
 
$
65,200

 
Probability-adjusted discounted cash flow
 
Probabilities of success
 
11% - 95% (57%)

 
 
 
 
 
Periods in which milestones are expected to be achieved
 
2015 - 2020

 
 
 
 
 
Discount rate
 
2.6% - 5.6%
Contingent purchase price: sales milestone
 
$
11,300

 
Risk-adjusted revenue simulation
 
Probabilities of success
 
11% - 63% (30%)
 
 
 
 
 
 
Periods in which milestone is expected to be achieved
 
2017 - 2022
 
 
 
 
 
 
Discount rate
 
4.6% - 6.4%
 
 
 
 
 
 
 
 
 
Tenaxis:
 
 
 
 
 
 
 
 
Contingent purchase price
 
$
25,700

 
Probability-adjusted discounted cash flow
 
Probabilities of success
 
5% - 100% (89%)
 
 
 
 
 
 
Periods in which milestones are expected to be achieved
 
2019 - 2029

13




 
 
 
 
 
 
Discount rate
 
4.2% - 26%
Annovation:
 
 
 
 
 
 
 
 
Contingent purchase price
 
$
16,000

 
Probability-adjusted discounted cash flow
 
Probabilities of success
 
8% - 50% (31%)
 
 
 
 
 
 
Periods in which milestones are expected to be achieved
 
2016 - 2030
 
 
 
 
 
 
Discount rate
 
3.3% - 8.0%
 
 
Fair Value as of
 
 
 
 
 
 
 
 
December 31, 2014
 
Valuation Technique
 
Unobservable Input
 
Range
(Weighted Average)
 
 
(in thousands)
 
 
 
 
 
 
Targanta:
 
 
 
 
 
 
 
 
Contingent purchase price
 
$
6,334

 
Probability-adjusted discounted cash flow
 
Probability of success
 
20%
 
 
 
 
 
 
Period in which milestone is expected to be achieved
 
2019
 
 
 
 
 
 
Discount rate
 
11%
Incline:
 
 
 
 
 
 
 
 
Contingent purchase price
 
$
123,800

 
Probability-adjusted discounted cash flow
 
Probabilities of success
 
64% -100% (83%)

 
 
 

 
Periods in which milestones are expected to be achieved
 
2015 - 2018

 
 
 
 
 
Discount Rate
 
18%
ProFibrix:
 
 
 
 
 

 
 
Contingent purchase price
 
$
88,600

 
Probability-adjusted discounted cash flow
 
Probabilities of success
 
5% - 95% (92%)

 
 
 
 
 
Periods in which milestones are expected to be achieved
 
2015 - 2017

 
 
 
 
 
Discount rate
 
2.5% - 24.1%
Rempex:
 
 
 
 
 

 
 
Contingent purchase price: commercial milestone
 
$
80,800

 
Probability-adjusted discounted cash flow
 
Probabilities of success
 
11% - 95% (63%)

 
 
 
 
 
Periods in which milestones are expected to be achieved
 
2015 - 2019

 
 
 
 
 
Discount rate
 
1.5% - 3.7%
Contingent purchase price: sales milestone
 
$
10,900

 
Risk-adjusted revenue simulation
 
Probabilities of success
 
9% - 49% (17%)
 
 
 
 
 
 
Periods in which milestones are expected to be achieved
 
2016 - 2022
 
 
 
 
 
 
Discount rate
 
1.5% - 4.5%
Tenaxis:
 
 
 
 
 
 
 
 
Contingent purchase price
 
$
40,700

 
Probability-adjusted discounted cash flow
 
Probabilities of success
 
5% - 100% (84%)
 
 
 
 
 
 
Periods in which milestones are expected to be achieved
 
2015 - 2026
 
 
 
 
 
 
Discount rate
 
1% - 20%

14




The fair value of the contingent purchase price represents the fair value of the Company's liability for all potential payments under the Company's acquisition agreements for Targanta, Incline, ProFibrix, Rempex, Tenaxis and Annovation. The significant unobservable inputs used in the fair value measurement of the Company's contingent purchase prices are the probabilities of successful achievement of development, regulatory and sales milestones, which would trigger payments under the Targanta, Incline, ProFibrix, Rempex, Tenaxis and Annovation agreements, probabilities as to the periods in which the milestones are expected to be achieved and discount rates. Significant changes in any of the probabilities of success would result in a significantly higher or lower fair value measurement. Significant changes in the probabilities as to the periods in which milestones will be achieved and significant changes in the discount rates used would result in a significantly lower or higher fair value measurement.

The changes in fair value of the Company's Level 3 contingent purchase price during the three and nine months ended September 30, 2015 and 2014 were as follows:

 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2015
 
2014
 
2015
 
2014
 
 
(in thousands)
 
 
 
 
Balance at beginning of period
 
207,160

 
360,780

 
351,134

 
302,363

Fair value of contingent purchase price with respect to Tenaxis as of May 1, 2014
 

 

 

 
37,900

Fair value of contingent purchase price with respect to Annovation as of February 2, 2015
 

 

 
18,000

 

Settlements
 
(3,600
)
 

 
(179,250
)
 

Fair value adjustment to contingent purchase prices included in net loss
 
747

 
8,214

 
14,423

 
28,731

Balance at end of period
 
$
204,307

 
$
368,994

 
$
204,307

 
$
368,994


For the three months ended September 30, 2015, the changes in the carrying value of the contingent purchase price obligations resulted from changes in the fair value of the contingent consideration due to either the passage of time or changes in probabilities of success or discount rate and payments made for milestones achieved. For the nine months ended September 30, 2015, the changes in the carrying value of the contingent purchase price obligations resulted from the initial estimate of the fair value of the contingent consideration related to the Company's acquisition of Annovation, subsequent changes in the fair value of the contingent consideration due to either the passage of time or changes in probabilities of success or discount rate and payments made for milestones achieved.

No other changes in valuation techniques or inputs occurred during the three and nine months ended September 30, 2015.  No transfers of assets between Level 1 and Level 2 of the fair value measurement hierarchy occurred during the three and nine months ended September 30, 2015.

8. Inventory

The major classes of inventory were as follows:

Inventory
 
September 30,
2015
 
December 31,
2014
 
 
(in thousands)
Raw materials
 
$
39,719

 
$
40,533

Work-in-progress
 
58,620

 
34,095

Finished goods
 
15,926

 
6,822

Total
 
$
114,265

 
$
81,450


The Company reviews inventory, including inventory purchase commitments, for slow moving or obsolete amounts based on expected volume and provides reserves against the carrying amount of inventory as appropriate. During the three-month period ended September 30, 2015 upon review of expected future product sales volumes, the Company recorded a $16.7 million inventory

15



obsolescence charge and a charge of $15.7 million for potential losses on future inventory purchase commitments due primarily to the loss of market exclusivity for Angiomax in the United States. For the nine-month period ended September 30, 2015, charges for inventory obsolescence and for potential losses on future inventory purchase commitments due primarily to the loss of market exclusivity for Angiomax in the United States total $25.1 million and $15.7 million, respectively.
9. Intangible Assets and Goodwill

The following information details the carrying amounts and accumulated amortization of the Company's intangible assets subject to amortization:

 
As of September 30, 2015
 
As of December 31, 2014
 
 
Weighted Average
Useful Life
 
Gross
Carrying
Amount
 
 
Accumulated
Amortization and Other Charges
 
Net
Carrying
Amount
 
Gross
Carrying
Amount
 
 
Accumulated
Amortization and Other Charges
 
Net
Carrying
Amount
 
 
 
(in thousands)
Identifiable intangible assets
 
 
 
 
 
 
 
 
 
 
 
 
 
Selling rights agreements
0.0 years
 
$
9,126

 
$
(9,126
)
 
$

 
$
9,125

 
$
(8,961
)
 
$
164

Product licenses
15.5 years
 
95,500

 
(71,336
)
 
24,164

 
71,000

 
(65,602
)
 
5,398

Developed product rights
15.4 years
 
793,107

 
(50,458
)
 
742,649

 
180,930

 
(6,513
)
 
174,417

Total
15.4 years
 
$
897,733

 
$
(130,920
)
 
$
766,813

 
$
261,055

 
$
(81,076
)
 
$
179,979


In the nine months ended September 30, 2015, the Company reclassified $250.0 million, $36.1 million and $176.0 million of IPR&D assets to developed product rights due to the approval of Ionsys in the United States, and Raplixa in the United States and Europe, respectively. In February 2015, the Company completed the acquisition of the remaining assets held by Bristol-Myers Squibb Company (BMS) which were exclusively related to Recothrom. The Company paid BMS approximately $132.4 million in the aggregate, including approximately $44.0 million for inventory. In the nine months ended September 30, 2015, the Company reclassified the value of the purchase option related to Recothrom and additional amounts paid to BMS to developed product rights and commenced amortization.
During the three months ended September 30, 2015, the Company recorded a charge of $25.8 million to reduce the carrying value of the product rights associated with PreveLeak to their estimated fair value as a result of a reduction in expected future cash flows.
The Company recognized an amortization expense and impairment charges of $33.7 million and $49.8 million related to its intangible assets in the three and nine months ended September 30, 2015, respectively. Fair value was based on expected future cash flows using Level 3 inputs under ASC 820. The cash flows are those expected to be generated by the market participants, discounted using a risk adjusted rate.
The Company expects amortization expense related to its intangible assets to be $12.9 million for the fourth quarter of 2015. The Company expects annual amortization expense related to its intangible assets to be $51.8 million, $51.9 million, $51.5 million, $51.2 million and $51.1 million for the years ending December 31, 2016, 2017, 2018, 2019 and 2020, respectively, with the balance of $496.4 million being amortized thereafter. The Company records amortization of selling rights agreements in selling, general and administrative expense in the accompanying consolidated statements of operations. The Company records amortization and any impairments of product licenses and developed product rights in cost of revenue in the accompanying consolidated statements of operations.

The following information details the carrying amounts of the Company's intangible assets not subject to amortization:


16



 
As of September 30, 2015
 
As of December 31, 2014
 
Gross
Carrying
Amount
 
 
Adjustments
 
Net
Carrying
Amount
 
Gross
Carrying
Amount
 
Adjustments
 
Net
Carrying
Amount
 
(in thousands)
Intangible assets not subject to amortization:
 
 
 
 
 
 
 
 
 
 
 
In-process research and development
$
253,620

 

 
$
253,620

 
$
650,680

 

 
$
650,680

Recothrom option

 

 

 
62,000

 

 
62,000

Total
$
253,620

 

 
$
253,620

 
$
712,680

 

 
$
712,680


On February 2, 2015, the Company completed the acquisition of Annovation, and Annovation became the Company's wholly owned subsidiary. As a result of the acquisition of Annovation, the Company recorded $65.0 million of in-process research and development for the acquisition of ABP-700, a novel intravenous anesthetic. See Note 12 "Acquisitions" for further information regarding the Company's acquisition of Annovation.

The changes in the carrying amount of goodwill for the nine months ended September 30, 2015 are as follows:
 
September 30, 2015
 
(in thousands)
Balance as of December 31, 2014
$
286,532

Goodwill resulting from the acquisition of Annovation
24,530

Translation adjustments
2,103

Balance as of September 30, 2015
$
313,165



10. Convertible Senior Notes

Convertible Senior Notes Due 2022

In January 2015, the Company issued, at par value, $400.0 million aggregate principal amount of 2.5% convertible senior notes due 2022. The 2022 Notes bear cash interest at a rate of 2.5% per year, payable semi-annually on January 15 and July 15 of each year, beginning on July 15, 2015. The 2022 Notes will mature on January 15, 2022. The net proceeds to the Company from the offering were $387.2 million after deducting the initial purchasers' discounts and commissions and the offering expenses payable by the Company.
 
The 2022 Notes are governed by an indenture (the 2022 Notes Indenture) with Wells Fargo Bank, National Association, a national banking association, as trustee (the 2022 Notes Trustee).

The 2022 Notes are senior unsecured obligations of the Company and will rank senior in right of payment to the Company’s future indebtedness that is expressly subordinated in right of payment to the 2022 Notes; equal in right of payment to the Company’s existing and future unsecured indebtedness that is not so subordinated; effectively junior in right of payment to any of the Company’s secured indebtedness to the extent of the value of the assets securing such indebtedness; and structurally junior to all existing and future indebtedness and other liabilities (including trade payables) incurred by the Company’s subsidiaries.

Holders may convert their 2022 Notes at their option at any time prior to the close of business on the business day immediately preceding October 15, 2021 only under the following circumstances:

during any calendar quarter commencing on or after March 31, 2015 (and only during such calendar quarter), if the last reported sale price of the Company’s common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day;


17



during the five business day period after any five consecutive trading day period (the measurement period) in which the trading price (as defined in the 2022 Notes Indenture) per $1,000 principal amount of 2022 Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of the Company’s common stock and the conversion rate on each such trading day;

during any period after the Company has issued notice of redemption until the close of business on the scheduled trading day immediately preceding the relevant redemption date; or

upon the occurrence of specified corporate events.

On or after October 15, 2021, until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert their 2022 Notes at any time, regardless of the foregoing circumstances. Upon conversion, the Company will pay cash up to the aggregate principal amount of the 2022 Notes to be converted and deliver shares of its common stock in respect of the remainder, if any, of its conversion obligation in excess of the aggregate principal amount of 2022 Notes being converted, subject to a daily share cap.
 
The conversion rate for the 2022 Notes was initially, and remains, 29.8806 shares of the Company’s common stock per $1,000 principal amount of the 2022 Notes, which is equivalent to an initial conversion price of approximately $33.47 per share of the Company’s common stock.

The Company may not redeem the 2022 Notes prior to January 15, 2019. The Company may redeem for cash all or any portion of the 2022 Notes, at its option, on or after January 15, 2019 if the last reported sale price of its common stock has been at least 130% of the conversion price then in effect on the last trading day of, and for at least 19 other trading days (whether or not consecutive) during, any 30 consecutive trading day period ending on, and including, the trading day immediately preceding the date on which the Company provides notice of redemption, at a redemption price equal to 100% of the principal amount of the 2022 Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date. No sinking fund is provided for the 2022 Notes, which means that the Company is not required to redeem or retire the 2022 Notes periodically.
 
If the Company undergoes a "fundamental change" (as defined in the Indenture governing the 2022 Notes Indenture), subject to certain conditions, holders of the 2022 Notes may require the Company to repurchase for cash all or part of their 2022 Notes at a repurchase price equal to 100% of the principal amount of the 2022 Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date.

The 2022 Notes Indenture contains customary events of default with respect to the 2022 Notes, including that upon certain events of default (including the Company’s failure to make any payment of principal or interest on the 2022 Notes when due and payable) occurring and continuing, the 2022 Notes Trustee by notice to the Company, or the holders of at least 25% in principal amount of the outstanding 2022 Notes by notice to the Company and the 2022 Notes Trustee, may, and the 2022 Notes Trustee at the request of such holders (subject to the provisions of the 2022 Notes Indenture) shall, declare 100% of the principal of and accrued and unpaid interest, if any, on all the 2022 Notes to be due and payable. In case of certain events of bankruptcy, insolvency or reorganization, involving the Company or a significant subsidiary, 100% of the principal of and accrued and unpaid interest on the 2022 Notes will automatically become due and payable. Upon such a declaration of acceleration, such principal and accrued and unpaid interest, if any, will be due and payable immediately.

The Company accounts for the 2022 Notes as a liability and equity component where the carrying value of the liability component will be valued based on a similar instrument. In accounting for the issuance of the 2022 Notes, the Company separated the 2022 Notes into liability and equity components. The carrying amount of the liability component was calculated by measuring the fair value of a similar liability that does not have an associated convertible feature. The carrying amount of the equity component representing the conversion option was determined by deducting the fair value of the liability component from the par value of the 2022 Notes as a whole. The excess of the principal amount of the liability component over its carrying amount, referred to as the debt discount, is amortized to interest expense over the seven-year term of the 2022 Notes. The equity component is not re-measured as long as it continues to meet the conditions for equity classification.

In accounting for the transaction costs related to the issuance of the 2022 Notes, the Company allocated the total costs incurred to the liability and equity components of the 2022 Notes based on their relative values. Transaction costs attributable to the liability component are amortized to interest expense over the seven-year term of the 2022 Notes, and transaction costs attributable to the equity component are netted with the equity components in stockholders’ equity. Additionally, the Company initially recorded a net deferred tax liability of $31.8 million in connection with the Notes.
The 2022 Notes consist of the following:

18



Liability component
 
September 30,
2015
 
December 31,
2014
 
 
(in thousands)
Principal
 
$
400,000

 
$

Less: Debt discount, net(1)
 
(81,536
)
 

Net carrying amount
 
$
318,464

 
$

(1) Included in the accompanying consolidated balance sheets within convertible senior notes (due 2022) and amortized to interest expense over the remaining life of the 2022 Notes using the effective interest rate method.
The fair value of the 2022 Notes was approximately $328.3 million as of September 30, 2015. The Company estimates the fair value of its 2022 Notes utilizing market quotations for debt that have quoted prices in active markets. Since the 2022 Notes do not trade on a daily basis in an active market, the fair value estimates are based on market observable inputs based on borrowing rates currently available for debt with similar terms and average maturities (Level 2). As of September 30, 2015, the remaining contractual life of the 2022 Notes is approximately 6.3 years.
The following table sets forth total interest expense recognized related to the 2022 Notes:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
 
(in thousands)
 
 
 
 
Contractual interest expense
$
2,505

 
$

 
$
7,139

 
$

Amortization of debt issuance costs
248

 

 
684

 

Amortization of debt discount
2,630

 

 
7,369

 

Total
$
5,383

 
$

 
$
15,192

 
$

Effective interest rate of the liability component
6.5
%
 
%
 
6.5
%
 
%

Convertible Senior Notes Due 2017

In June 2012, the Company issued, at par value, $275.0 million aggregate principal amount of 1.375% convertible senior notes due June 1, 2017. The 2017 Notes bear cash interest at a rate of 1.375% per year, payable semi-annually on June 1 and December 1 of each year, beginning on December 1, 2012. The 2017 Notes will mature on June 1, 2017. The net proceeds to the Company from the offering were $266.2 million after deducting the initial purchasers' discounts and commissions and the offering expenses payable by the Company.

The 2017 Notes are governed by an indenture dated as of June 11, 2012 (the 2017 Notes Indenture), between the Company, as issuer, and Wells Fargo Bank, National Association, a national banking association, as trustee (the 2017 Notes Trustee). The 2017 Notes do not contain any financial or operating covenants or any restrictions on the payment of dividends, the incurrence of other indebtedness, or the issuance or repurchase of securities by the Company.

The 2017 Notes are senior unsecured obligations of the Company and will rank senior in right of payment to the Company's future indebtedness, if any, that is expressly subordinated in right of payment to the 2017 Notes and equal in right of payment to the Company's existing and future unsecured indebtedness that is not so subordinated.  The 2017 Notes are effectively junior in right of payment to any secured indebtedness of the Company to the extent of the value of the assets securing such indebtedness and are structurally junior to all existing and future indebtedness and other liabilities (including trade payables) incurred by the Company's subsidiaries.

Holders may convert their 2017 Notes at their option at any time prior to the close of business on the business day immediately preceding March 1, 2017 only under the following circumstances:

during any calendar quarter commencing on or after September 1, 2012 (and only during such calendar quarter), if the last reported sale price of the Company's common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price (described below) on each applicable trading day;

during the five business day period after any five consecutive trading day period (the Measurement Period) in which the trading price (as defined in the 2017 Notes Indenture) per $1,000 principal amount of 2017 Notes for each trading day

19



of the Measurement Period was less than 98% of the product of the last reported sale price of the Company's common stock and the conversion rate on each such trading day; or

upon the occurrence of specified corporate events, including a merger or a sale of all or substantially all of the Company's assets. 

During the three-month period ended September 30, 2015, the conditional conversion feature of the 2017 Notes was triggered and the holders are currently entitled to convert the notes into our common stock through December 31, 2015. In any period when holders of the 2017 Notes are eligible to exercise their conversion option, the liability component related to these instruments is classified as current and the equity component related to these instruments is classified as mezzanine (temporary) equity, as the Company is required to settle the aggregate principal amount of the notes in cash. If in any future period the conversion threshold requirements of the 2017 Notes are not met, then the liability component of the instrument is classified as non-current and the difference between (1) the amount of cash deliverable upon conversion (i.e., par value of debt) and (2) the carrying value of the debt component will be reclassified from mezzanine equity to permanent equity, and will continue to be reported as permanent equity for any period in which the debt is not currently convertible.

On or after March 1, 2017, until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert their 2017 Notes at any time, regardless of the foregoing circumstances. Upon conversion, the Company will pay cash up to the aggregate principal amount of the 2017 Notes to be converted and deliver shares of the Company's common stock in respect of the remainder, if any, of the Company's conversion obligation in excess of the aggregate principal amount of the 2017 Notes being converted, subject to a daily share cap, as described in the 2017 Notes Indenture. Holders of 2017 Notes will not receive any additional cash payment or additional shares representing accrued and unpaid interest, if any, upon conversion of a 2017 Note, except in limited circumstances. Instead, accrued but unpaid interest will be deemed to be paid by the cash and shares, if any, of the Company's common stock, together with any cash payment for any fractional share, paid or delivered, as the case may be, upon conversion of a 2017 Note.

The conversion rate for the 2017 Notes was initially, and remains, 35.8038 shares of the Company's common stock per $1,000 principal amount of the 2017 Notes, which is equivalent to an initial conversion price of $27.93 per share of the Company's common stock. The conversion rate and the conversion price are subject to customary adjustments for certain events, including, but not limited to, the issuance of certain stock dividends on the Company's common stock, the issuance of certain rights or warrants, subdivisions, combinations, distributions of capital stock, indebtedness, or assets, cash dividends and certain issuer tender or exchange offers, as described in the 2017 Notes Indenture.

The Company may not redeem the 2017 Notes prior to maturity and is not required to redeem or retire the 2017 Notes periodically. However, upon the occurrence of a "fundamental change" (as defined in the 2017 Notes Indenture), subject to certain conditions, in lieu of converting their 2017 Notes, holders may require the Company to repurchase for cash all or part of their 2017 Notes at a repurchase price equal to 100% of the principal amount of the 2017 Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date. Following certain corporate transactions that constitute a change of control, the Company will increase the conversion rate for a holder who elects to convert the 2017 Notes in connection with such change of control in certain circumstances.

The 2017 Notes Indenture contains customary events of default with respect to the 2017 Notes, including that upon certain events of default (including the Company's failure to make any payment of principal or interest on the 2017 Notes when due and payable) occurring and continuing, the 2017 Notes Trustee by notice to the Company, or the holders of at least 25% in principal amount of the outstanding 2017 Notes by notice to the Company and the 2017 Notes Trustee, may, and the 2017 Notes Trustee at the request of such holders (subject to the provisions of the 2017 Notes Indenture) shall, declare 100% of the principal of and accrued and unpaid interest, if any, on all the 2017 Notes to be due and payable.  In case of an event of default involving certain events of bankruptcy, insolvency or reorganization, involving the Company or a significant subsidiary, 100% of the principal of and accrued and unpaid interest on the 2017 Notes will automatically become due and payable. Upon a declaration of acceleration, such principal and accrued and unpaid interest, if any, will be due and payable immediately.

In accounting for the issuance of the 2017 Notes, the Company separated the 2017 Notes into liability and equity components. The carrying amount of the liability component was calculated by measuring the fair value of a similar liability that does not have an associated convertible feature. The carrying amount of the equity component representing the conversion option was determined by deducting the fair value of the liability component from the par value of the 2017 Notes as a whole. The excess of the principal amount of the liability component over its carrying amount, referred to as the debt discount, is amortized to interest expense over the five-year term of the 2017 Notes. The equity component is not re-measured as long as it continues to meet the conditions for equity classification.


20



In accounting for the transaction costs related to the issuance of the 2017 Notes, the Company allocated the total costs incurred to the liability and equity components of the 2017 Notes based on their relative values. Transaction costs attributable to the liability component are amortized to interest expense over the five-year term of the 2017 Notes, and transaction costs attributable to the equity component are netted with the equity components in stockholders’ equity.
The 2017 Notes consist of the following:
Liability component
 
September 30,
2015
 
December 31,
2014
 
 
(in thousands)
Principal
 
$
275,000

 
$
275,000

Less: Debt discount, net(1)
 
(19,953
)
 
(28,324
)
Net carrying amount
 
$
255,047

 
$
246,676

(1) Included in the accompanying consolidated balance sheets within convertible senior notes (due 2017) and amortized to interest expense over the remaining life of the 2017 Notes using the effective interest rate method.
The fair value of the 2017 Notes was approximately $264.7 million as of September 30, 2015. The Company estimates the fair value of its 2017 Notes utilizing market quotations for debt that have quoted prices in active markets. Since the 2017 Notes do not trade on a daily basis in an active market, the fair value estimates are based on market observable inputs based on borrowing rates currently available for debt with similar terms and average maturities (Level 2). As of September 30, 2015, the remaining contractual life of the 2017 Notes is approximately 1.7 years.
The following table sets forth total interest expense recognized related to the 2017 Notes:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
 
(in thousands)
 
 
 
 
Contractual interest expense
$
945

 
$
945

 
$
2,836

 
$
2,836

Amortization of debt issuance costs
382

 
340

 
1,110

 
985

Amortization of debt discount
2,836

 
2,673

 
8,370

 
7,889

Total
$
4,163

 
$
3,958

 
$
12,316

 
$
11,710

Effective interest rate of the liability component
6.02
%
 
6.02
%
 
6.02
%
 
6.02
%

Note Hedges. In June 2012, the Company paid an aggregate amount of $58.2 million for the 2017 Note Hedges, which was recorded as a reduction of additional paid-in-capital in stockholders' equity. The 2017 Note Hedges cover approximately 9.8 million shares of the Company’s common stock, subject to anti-dilution adjustments substantially similar to those applicable to the 2017 Notes, have a strike price that corresponds to the initial conversion price of the 2017 Notes and are exercisable upon conversion of the 2017 Notes. The 2017 Note Hedges will expire upon the maturity of the 2017 Notes. The 2017 Note Hedges are expected generally to reduce the potential dilution with respect to shares of the Company's common stock upon conversion of the 2017 Notes in the event that the market price per share of the Company’s common stock, as measured under the terms of the 2017 Note Hedges, at the time of exercise is greater than the strike price of the 2017 Note Hedges. The 2017 Note Hedges are separate transactions entered into by the Company with the 2017 Hedge Counterparties and are not part of the terms of the 2017 Notes or the 2017 Warrants. Holders of the 2017 Notes and 2017 Warrants will not have any rights with respect to the 2017 Note Hedges. As of September 30, 2015, the fair value of the 2017 Note Hedges was $133.4 million. The Company estimates the fair value of its 2017 Note Hedges using Monte Carlo simulations model of its stock price (Level 2).

Warrants. The Company received aggregate proceeds of $38.4 million from the sale to the 2017 Hedge Counterparties of the 2017 Warrants to purchase up to 9.8 million shares of the Company's common stock, subject to customary anti-dilution adjustments, at a strike price of $34.20 per share, which the Company recorded as additional paid-in-capital in stockholders' equity. The 2017 Warrants will have a dilutive effect with respect to the Company's common stock to the extent that the market price per share of the Company's common stock, as measured under the terms of the 2017 Warrants, exceeds the applicable strike price of the 2017 Warrants. However, subject to certain conditions, the Company may elect to settle all of the 2017 Warrants in cash. The 2017 Warrants were anti-dilutive for the three and nine months ended September 30, 2015. The 2017 Warrants are separate transactions entered into by the Company with the 2017 Hedge Counterparties and are not part of the terms of the 2017 Notes or 2017 Note Hedges. Holders of the 2017 Notes and 2017 Note Hedges will not have any rights with respect to the 2017 Warrants. The 2017 Warrants also meet the definition of a derivative under current accounting principles. Because the 2017 Warrants are indexed to

21



the Company's common stock and are recorded in equity in the Company's consolidated balance sheets, the 2017 Warrants are exempt from the scope and fair value provisions of accounting principles related to accounting for derivative instruments.

11. Treasury Stock

As of September 30, 2015 and December 31, 2014 there were 2,192,982 shares of the Company's common stock held in treasury.
12. Acquisitions

Annovation

On February 2, 2015, the Company completed the acquisition of Annovation, and Annovation became the Company's wholly owned subsidiary. As a result of the acquisition of Annovation, the Company acquired ABP-700, a novel intravenous anesthetic.

Under the terms of the acquisition agreement, the Company paid to the holders of Annovation’s capital stock and the holders of options to purchase shares of Annovation’s capital stock, (collectively, the Annovation equityholders), an aggregate of approximately $28.4 million in cash. In addition, the Company may be obligated to pay Annovation's equityholders up to an additional $26.3 million in milestone payments subsequent to the closing if the Company achieves certain development and regulatory approval milestones at the times and on the conditions set forth in the acquisition agreement. The Company has also agreed to pay Annovation equityholders a low single digit percentage of worldwide net sales, if any, of certain Annovation products, including ABP-700, during a specified earnout period.

In accordance with ASC 805, the Company accounted for this transaction as a step acquisition which required that the Company remeasure its then existing 35.8% ownership interest (previously accounted for as an equity method investment) to fair value at the acquisition date based upon the total enterprise value, adjusting for a control premium. The fair value of the Company's interest in Annovation was $25.9 million at closing, resulting in a non-cash pre-tax gain of $22.7 million, recorded as gain on remeasurement of equity investment in the Company's accompanying consolidated statements of operations. The Company's previously recorded equity method investment in Annovation was derecognized from the Company's consolidated balance sheets. Since the date of the step acquisition, the financial results of Annovation were included within the Company's consolidated financial statements. In accordance with the acquisition method of accounting, the Company allocated the acquisition cost for the Annovation transaction to the underlying assets acquired and liabilities assumed by the Company, based upon estimated fair values of those assets and liabilities at the date of acquisition and will classify the fair value of acquired IPR&D as indefinite-lived assets until the successful completion or abandonment of the associated research and development efforts.

The Company recognized as goodwill from the transaction an amount equal to the excess of the purchase price over the fair value amounts assigned to the assets acquired and liabilities assumed by the Company. The goodwill recorded as part of the acquisition is primarily related to establishing a deferred tax liability for the IPR&D intangible asset which has no tax basis and, therefore, will not result in a future tax deduction. The Company does not expect any portion of this goodwill to be deductible for tax purposes. The Company has recorded the goodwill attributable to the acquisition as a non-current asset on the accompanying consolidated balance sheets. The goodwill attributable to the acquisition is not amortized, but the Company reviews its goodwill annually for impairment.

The Company accounted for the transaction as a business combination and is in the process of finalizing the valuation of intangible assets and fair value of the contingent purchase price. As a result, the preliminary measurements of intangible assets, goodwill and deferred income tax liabilities described below are subject to change. The results of Annovation operations have been included in the accompanying consolidated statements of operations from the date of acquisition.

The Company did not incur any significant acquisition related costs in connection with the Annovation acquisition during the three and nine months ended September 30, 2015.

Total purchase price is summarized as follows:


22



 
 
 
(In thousands)
Upfront cash consideration
 
 
$
28,397

Fair value of existing equity interest in Annovation
 
 
25,886

Total cash consideration and fair value of existing equity interest
 
 
54,283

Fair value of contingent cash payment
 
 
18,000

Total purchase price
 
 
$
72,283

 
 
 
 

Below is a summary which details the allocation of assets acquired and liabilities assumed as a result of this acquisition:

Assets Acquired:
 
 
(In thousands)
 
 
 
 
Cash and cash equivalents
 
 
$
1,482

Other current assets
 
 
692

IPR&D
 
 
65,000

Goodwill
 
 
24,530

Total assets
 
 
$
91,704

 
 
 
 
Liabilities assumed:
 
 
 
 
 
 
 
Accrued expenses
 
 
$
398

Contingent purchase price
 
 
18,000

Deferred tax liability
 
 
19,023

Total liabilities
 
 
$
37,421

 
 
 
 
Total cash price paid upon acquisition and fair value of existing equity interest
 
 
$
54,283


Pro forma results of operations for the acquisition of Annovation have not been presented because this acquisition is not material to the Company's consolidated results of operations.
  
13. Accumulated Other Comprehensive Income
The changes in accumulated other comprehensive income are as follows:
 
 
 
 
 
Foreign currency translation adjustment
 
Total
 
 
(in thousands)
Balance as of December 31, 2014
 
$
2,528

 
$
2,528

Other comprehensive income before reclassifications
 
859

 
859

Amounts reclassified from accumulated other comprehensive income*
 

 

   Total other comprehensive income
 
859

 
859

Balance as of September 30, 2015
 
$
3,387

 
$
3,387

* Amounts reclassified affect other income in the accompanying consolidated statements of operations.

14. Segment and Geographic Information


23



The Company manages its business and operations as one segment and is focused on advancing the treatment of acute and intensive care patients through the delivery of innovative, cost-effective medicines to the worldwide hospital marketplace. Revenues reported to date are derived primarily from the sales of Angiomax in the United States.

The geographic segment information provided below is classified based on the major geographic regions in which the Company operates.

 
Three Months Ended September 30,
 
 
Nine Months Ended September 30,
 
 
2015
 
 
 
2014
 
 
2015
 
 
 
2014
 
 
(in thousands)
 
 
 
 
 
(in thousands)
 
Net revenue:
 
 
 
 
 
 
 
 
 
 
 
 
 
United States
$
68,746

 
94.6
%
 
$
164,935

95.6
%
 
$
274,771

 
94.9%
 
$
505,312

94.7%
Europe
3,495

 
4.8
%
 
6,651

3.9
%
 
13,132

 
4.5%
 
25,160

4.7%
Rest of world
437

 
0.6
%
 
815

0.5
%
 
1,763

 
0.6%
 
2,938

0.6%
Total net revenue
$
72,678

 
100.0
%
 
$
172,401

100.0
%
 
$
289,666

 
100.0%
 
$
533,410

100.0%


 
September 30,
2015
 
 
 
December 31,
2014
 
 
(in thousands)
 
Long-lived assets:
 
 
 
 
 
 
United States
$
1,377,666

 
99.4
%
 
$
1,218,370

99.3
%
Europe
8,136

 
0.6
%
 
8,899

0.7
%
Rest of world

 
%
 
16

%
Total long-lived assets
$
1,385,802

 
100.0
%
 
$
1,227,285

100.0
%

15. Contingencies

The Company may be, from time to time, a party to various disputes and claims arising from normal business activities. The Company accrues for loss contingencies when available information indicates that it is probable that a liability has been incurred and the amount of such loss can be reasonably estimated. In the cases where the Company believes that a reasonably possible loss exists, the Company discloses the facts and circumstances of the litigation, including an estimable range, if possible.

The Company is currently party to the legal proceedings described in Part II, Item 1, Legal Proceedings, of this quarterly report on Form 10-Q, which include patent litigation matters, a class action litigation and litigation related to a license agreement. The Company has assessed such legal proceedings and does not believe that it is probable that a liability has been incurred or that the amount of any potential liability can be reasonably estimated. As a result, the Company did not record any loss contingencies for any of these matters. Particularly with respect to the litigation related to a Company license agreement, the Company is presently unable to predict the outcome of such lawsuit or to reasonably estimate the possible loss, or range of potential losses, if any, related to such lawsuit. While it is not possible to determine the outcome of the matters described in Part II, Item 1, Legal Proceedings, of this quarterly report on Form 10-Q, the Company believes it is possible that the resolution of all such matters could have a material adverse effect on its business, financial condition or results of operations.

16. Collaboration Agreements

Alnylam Pharmaceuticals, Inc.

In February 2013, the Company entered into a license and collaboration agreement with Alnylam to develop, manufacture and commercialize therapeutic products targeting the proprotein convertase subtilisin/kexin type 9 (PCSK9) gene, based on certain of Alnylam's RNA interference (RNAi) technology. Under the terms of the agreement, the Company obtained the exclusive, worldwide right under Alnylam's technology to develop, manufacture and commercialize PCSK-9 products for the treatment, palliation and/or prevention of all human diseases. Alnylam is responsible for the development costs of the products, subject to an agreed upon limit, until the completion of Phase 1 clinical studies. The Company is responsible for completing and funding the development costs of the products through commercialization, if successful. The Company paid Alnylam $25 million in an initial license payment

24



and an additional $10 million upon the achievement of a milestone, which payments the Company recorded as research and development expenses. The Company has also agreed to pay up to an aggregate of $170 million in success-based development and commercialization milestones. In addition, the Company has agreed to pay specified royalties on net sales of these products. Royalties to Alnylam are payable by the Company on a product-by-product and country-by-country basis until the last to occur of the expiration of patent rights in the applicable country that cover the applicable product, the expiration of non-patent regulatory exclusivities for such product in such country, and the twelfth anniversary of the first commercial sale of the product in such country, subject to reduction in specified circumstances. The Company is also responsible for paying royalties, and in some cases, milestone payments, owed by Alnylam to its licensors with respect to intellectual property covering these products. In December 2014, under the terms of the license and collaboration agreement with Alnylam, Alnylam initiated a Phase I clinical trial of ALN-PCSsc in the UK.

SciClone Pharmaceuticals

On December 16, 2014, the Company entered into strategic collaboration with SciClone Pharmaceuticals (SciClone) under which the Company granted SciClone a license and the exclusive rights to promote, market and sell Angiomax and Cleviprex in China. Under the terms of the collaboration, SciClone will be responsible for all aspects of commercialization, including pre- and post-launch activities, for both products in the China market (excluding Hong Kong and Macau) and will assist the Company in the registration process for both products in China. The Company has filed in China for marketing approval of Angiomax and to conduct clinical trials of Cleviprex. SciClone has agreed to pay the Company an upfront payment, a product support services fee and regulatory/commercial success milestone payments of up to an aggregate of $50.5 million, and royalties based on net sales of Angiomax and Cleviprex in China.

Activities under the SciClone agreement were evaluated under ASC 605-25, Revenue Recognition-Multiple Element Arrangements (ASC 605-25) (as amended by ASU 2009-13, Revenue Recognition) to determine if they represented a multiple element revenue arrangement. The SciClone agreement includes the following deliverables: (1) an exclusive license to commercialize Angiomax and Cleviprex in China, excluding Hong Kong and Macau; (2) the Company's obligation to conduct research and development activities related to the approvals of Angiomax and Cleviprex; and (3) the Company’s obligation to participate on the joint operating committee established under the terms of the SciClone agreement and related subcommittees. All of these deliverables were deemed to have stand-alone value and to meet the criteria to be accounted for as separate units of accounting under ASC 605-25. Factors considered in this determination included, among other things, the subject of the licenses and the research and development and commercial capabilities of SciClone. Accordingly, each unit will be accounted for separately. Since inception and for the nine months ended September 30, 2015, the Company recorded $8.1 million of revenue associated with the SciClone agreement as co-promotion and license income.
  
The Company believes the regulatory approval milestones that may be achieved under the SciClone agreement are consistent with the definition of a milestone included in ASU 2010-17, Revenue Recognition-Milestone Method, and accordingly, the Company will recognize payment related to the achievement of such milestone, if any, when the applicable milestone is achieved. Factors considered in this determination included scientific and regulatory risks that must be overcome to achieve each milestone, the level of effort and investment required to achieve each milestone, and the monetary value attributed to each milestone.

17. Restructuring

On October 22, 2014, the Company commenced implementation of a reorganization of its European operations intended to improve efficiency and better align the Company's costs and employment structure with its strategic plans. The Company completed its reorganization of its European operations in December 2014 and recorded a one-time charge of $9.0 million for the year ended December 31, 2014. Of the $9.0 million in one-time charges, $8.7 million related to work-force reduction, recorded in research and development and selling, general and administrative expenses in the accompanying statement of operations, and $0.3 million in lease charges recorded in selling, general and administrative expenses in the accompanying statement of operations.

During the nine months ended September 30, 2015, the Company paid $5.5 million in work-force reduction charges and $0.1 million in lease payments. The Company expects to pay the remainder during 2015.

25



 
Balance as
of January 1,
2015
 
Expenses,
Net
 
Cash
 
Noncash
 
Balance as of
September 30, 2015
 
(In thousands)
Employee severance and other personnel benefits:
 

 
 

 
 

 
 

 
 

2014 European workforce reduction
$
7,694

 
$
(713
)
 
$
(5,514
)
 
$
(6
)
 
$
1,461

2014 European leases and equipment write-off
200

 

 
(130
)
 

 
70

Total
$
7,894

 
$
(713
)
 
$
(5,644
)
 
$
(6
)
 
$
1,531




Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and accompanying notes included elsewhere in this quarterly report on Form 10-Q. In addition to the historical information, the discussion in this quarterly report on Form 10-Q contains certain forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated by the forward-looking statements due to our critical accounting estimates discussed below and important factors set forth in this quarterly report on Form 10-Q, including under “Risk Factors” in Part II, Item 1A of this quarterly report on Form 10-Q.

Overview

Our Business

We are a global biopharmaceutical company focused on saving lives, alleviating suffering and contributing to the economics of healthcare by focusing on leading acute/intensive care hospitals worldwide. We market or have received marketing approval for Angiomax® (bivalirudin), Cleviprex® (clevidipine) injectable emulsion, Ionsys® (fentanyl iontophoretic transdermal system), KengrealTM (cangrelor), Minocin® (minocycline) for injection, Orbactiv® (oritavancin), PreveLeakTM, RaplixaTM (fibrin sealant) and Recothrom® Thrombin topical (Recombinant). We also have a pipeline of acute and intensive care hospital products in development, including ABP-700, ALN-PCSsc, Carbavance® and MDCO-216. We have the right to develop, manufacture and commercialize ALN-PCSsc under our collaboration agreement with Alnylam Pharmaceuticals, Inc., or Alnylam. We believe that our products and products in development possess favorable attributes that competitive products do not provide, can satisfy unmet medical needs in the acute and intensive care hospital product market and offer, or, in the case of our products in development, have the potential to offer, improved performance to hospital businesses.

In addition to these products and products in development, we sell a ready‑to‑use formulation of Argatroban and have a portfolio of ten generic drugs, which we refer to as our acute care generic products, that we have the non‑exclusive right to market in the United States. We are currently selling three of our acute care generic products, midazolam, ondansetron and rocuronium.

On July 2, 2015 we entered into a supply and distribution agreement with Sandoz Inc., or Sandoz, under which we granted Sandoz the exclusive right to sell in the United States an authorized generic of Angiomax (bivalirudin). We entered into the supply and distribution agreement as a result of the July 2, 2015 U.S. Court of Appeals for the Federal Circuit, or Federal Circuit Court, ruling against us in our patent infringement litigation with Hospira, Inc., or Hospira, with respect to U.S. Patent No. 7,582,727, or the '727 patent, and U.S. Patent No. 7,598,343, or the '343 patent, covering a more consistent and improved Angiomax drug product and the processes by which it is made.

On November 3, 2015, we announced that we were in the process of evaluating our operations with a goal of unlocking stockholder value. In particular, we stated our current intention was to explore strategies for optimizing our capital structure and liquidity position and to narrow our operational focus by strategically separating non-core businesses and products in order to generate non-dilutive cash and reduce associated cash burn and capital requirements, including, among other things, by potentially divesting or partnering PreveLeak, Raplixa and Recothrom, likely in more than one transaction.
 
The following table identifies each of our marketed and approved products and our products in development, their stage of development, their mechanism of action and the indications for which they have been approved for use or which they are intended to address. The table also identifies each of our acute care generic products and the therapeutic areas which they are intended to address. All of our products and products in development, except for ALN‑PCSsc, Ionsys, PreveLeak, Raplixa and Recothrom, are administered intravenously. Each of PreveLeak, Recothrom, and Raplixa is a topical hemostat, Ionsys is administered

26



transdermally and ALN‑PCSsc is being developed as a subcutaneous injectable. All of our acute care generic products are injectable products.

Product or Product
in Development
 
Development Stage
 
Mechanism/Target
 
Clinical Indication(s)/Therapeutic Areas
Marketed and Approved Products
 
 
 
 
 
 
Angiomax
 
Marketed as a branded product, and as an authorized generic in the United States through Sandoz
 
Direct thrombin inhibitor
 
U.S. - for use as an anticoagulant in combination with aspirin in patients with unstable angina undergoing percutaneous transluminal coronary angioplasty, or PTCA, and for use in patients undergoing percutaneous coronary intervention, or PCI, including patients with or at risk of heparin induced thrombocytopenia and thrombosis syndrome, or HIT/HITTS
 
 
 
 
 
 
Europe - for use as an anticoagulant in patients undergoing PCI, adult patients with acute coronary syndrome, or ACS, and for the treatment of patients with ST-segment elevation myocardial infarction, or STEMI, undergoing primary PCI
Cleviprex
 
Marketed in the United States, Australia, Germany, Spain and Switzerland

Approved in Austria, Belgium, Canada, France, Liechtenstein, Luxembourg, the Netherlands, New Zealand, Sweden and the United Kingdom

Marketing Authorization Application, or MAA, submitted for other European Union countries
 
Calcium channel blocker
 
U.S. - Blood pressure reduction when oral therapy is not feasible or not desirable

Ex-U.S. - with various indications for blood pressure control in perioperative settings
Ionsys
 
Marketed in the United States; MAA accepted for review in European Union in the third quarter of 2014
 
Patient-controlled analgesia system
 
Short-term management of acute postoperative pain in hospitalized patients
Kengreal
 
Marketed in the United States; Approved in the European Union
 
 
Antiplatelet agent
 
Adjunct to PCI for reducing risk of periprocedural thrombotic events in patients who have not been treated with a P2Y12 inhibitor and are not being given a GPI

Minocin IV
 
Marketed in the United States
 
Tetracycline-class antibiotic
 
Treatment of bacterial infections due to susceptible isolates of designated microorganisms, including Acinetobacter species.

Orbactiv
 
Marketed in the United States; Approved in the European Union
 
Antibiotic
 
Treatment of adult patients with acute bacterial skin and skin structure infections, or ABSSSI, caused or suspected to be caused by susceptible isolates of the label-designated gram-positive microorganisms, including methicillin-resistant Staphylococcus aureus, or MRSA


27



PreveLeak
 
Approved in the United States; Marketed in the European Union
 
Mechanical vascular and surgical sealant
 
 
U.S. - for use as a vascular sealant Europe - for use in cardiac, vascular and soft tissue reconstructions to achieve adjunctive hemostasis by mechanically sealing areas of leakage
                                                                   
Raplixa
 
Approved in the United States and the European Union
 
Dry powder topical formulation of fibrinogen and thrombin
 
For use as an aid to control mild to moderate bleeding during surgery
Ready-to-use Argatroban
 
Marketed in the United States
 
Direct thrombin inhibitor
 
For prophylaxis or treatment of thrombosis in adult patients with HIT and for use as an anticoagulant in adult patients with or at risk for HIT undergoing PCI
Recothrom
 
Marketed in the United States
 
Recombinant human thrombin
 
For use as an aid to hemostasis to help control oozing blood and mild bleeding during surgical procedures

Acute care generic products:  Adenosine, Amiodarone, Esmolol and Milrinone
 
Approved in the United States
 
Various
 
Acute cardiovascular
Acute care generic products: Azithromycin and Clindamycin
 
Approved in the United States
 
Various
 
Serious infectious disease
Acute care generic products: Haloperidol, Midazolam, Ondansetron and Rocuronium
 
Approved in the United States; Midazolam, Ondansetron and Rocuronium marketed in the United States
 
Various
 
Surgery and perioperative
Research and Development Stage
 
 
 
 
 
 
ABP-700
 
Phase 1
 
Analogue of etomidate, an intravenous imidazole agent used for induction of general anesthesia
 
Sedative-hypnotic used to induce and maintain sedation for procedural care and general anesthesia for surgical care
 

ALN-PCSsc
 
Phase 1 completed
 
PCSK-9 gene antagonist addressing low-density lipoprotein cholesterol disease modification
 
Treatment of hypercholesterolemia
Carbavance
 
Phase 3 clinical trial commenced in the fourth quarter of 2014
 
Combination of RPX-7009, a proprietary, novel beta-lactamase inhibitor, with meropenem, a carbapenem antibiotic
 
Treatment of hospitalized patients with serious gram-negative bacterial infections
MDCO-216
 
Phase 1/2
 
Naturally occurring variant of a protein found in high-density lipoprotein
 
Reverse cholesterol transport agent to reduce atherosclerotic plaque burden development and thereby reduce the risk of adverse thrombotic events


Our revenues to date have been generated primarily from sales of Angiomax in the United States. In the nine months ended September 30, 2015, we had net product revenue from sales of Angiomax of approximately $188.8 million, net revenue from sales of Recothrom of approximately $47.5 million and aggregate net revenue from sales of Cleviprex, Minocin IV, PreveLeak, Orbactiv, ready-to-use Argatroban, Kengreal and Ionsys of approximately $28.9 million. During this period, net product revenue from sales of Angiomax decreased by $281.0 million from the nine months ended September 30, 2014. As a result of our July 2015 supply and distribution agreement with Sandoz, we recognized $24.5 million of royalty revenue related to the authorized generic sales of Angiomax (bivalirudin) in the three and nine months ended September 30, 2015. We expect that net revenue from sales of Angiomax will continue to decline in 2015 and in future years due to competition from generic versions of bivalirudin following

28



the loss of market exclusivity in the United States in July 2015 and in Europe in August 2015. Based on our current business, we expect to incur net losses for the foreseeable future.

Cost of revenue represents expenses in connection with contract manufacture of our products sold and logistics, product costs, royalty expenses and amortization of the costs of license agreements, amortization and impairments of product rights and other identifiable intangible assets from product and business acquisitions and expenses related to excess inventory. Research and development expenses represent costs incurred for licenses of rights to products, clinical trials, nonclinical and preclinical studies, regulatory filings and manufacturing development efforts. We outsource much of our clinical trials, nonclinical and preclinical studies and all of our manufacturing development activities to third parties to maximize efficiency and minimize our internal overhead. We expense our research and development costs as they are incurred. Selling, general and administrative expenses consist primarily of salaries and related expenses, costs associated with general corporate activities, changes in fair value of contingent purchase price obligations related to our acquisitions, and costs associated with marketing and promotional activities. Research and development expense, selling, general and administrative expense and cost of revenue also include share-based compensation expense, which we allocate based on the responsibilities of the recipients of the share-based compensation.

Angiomax Developments

The principal U.S. patents covering Angiomax included U.S. Patent No. 5,196,404, or the '404 patent, the '727 patent and the '343 patent. The term of the '404 patent expired on December 15, 2014 and the six-month period of pediatric exclusivity following expiration of the '404 patent resulting from our study of Angiomax in the pediatric setting ended June 15, 2015. The '727 patent and the '343 patent, issued to us by the U.S. Patent and Trademark Office, or PTO, in the second half of 2009, covering a more consistent and improved Angiomax drug product and the processes by which it is made, were set to expire in July 2028. In response to Paragraph IV Certification Notice letters we received with respect to ANDAs filed by a number of parties with the FDA seeking approval to market generic versions of Angiomax, we filed lawsuits against such ANDA filers alleging patent infringement of the '727 patent and '343 patent. We have since entered into settlement agreements with respect to our suits against three ANDA filers, Teva Pharmaceuticals USA, Inc. and its affiliates, or Teva, APP Pharmaceuticals LLC, or APP, and Sun Pharmaceutical Industries LTD, or Sun Pharmaceuticals Industries Ltd. and affiliates, or Sun.

On July 2, 2015, the Federal Circuit Court ruled against us in our patent infringement litigation with Hospira with respect to the '727 patent and the '343 patent. In its ruling, the Federal Circuit Court held the '727 patent and '343 patent invalid. As a result of the ruling, we do not have market exclusivity for Angiomax (bivalirudin) in the United States. On July 15, 2015, Hospira's ANDAs for its generic versions of bivalirudin were approved by the FDA. As a result of the Federal Circuit Court's ruling in the Hospira matter and the FDA's approval of Hospira's ANDAs, Angiomax is subject to generic competition from Hospira in the United States. On July 31, 2015, we filed a combined petition for panel rehearing and rehearing en banc with respect to the Federal Circuit Court's July 2, 2015 decision. On August 24, 2015, the Federal Circuit Court invited Hospira to respond to the petition and on September 8, 2015, Hospira filed a response. As of November 6, 2015, the Federal Circuit Court has yet to issue a decision on the petition.

In light of the decision by the Federal Circuit Court in the Hospira matter, on July 2, 2015, we entered into a Supply and Distribution Agreement with Sandoz under which we granted Sandoz the exclusive right to sell in the United States an authorized generic of Angiomax (bivalirudin). The authorized generic of Angiomax is sold under our approved NDA for Angiomax but labeled and sold under the Sandoz name. Under the agreement, we have agreed to supply Sandoz with Angiomax, and Sandoz has agreed to purchase Angiomax exclusively from us. Sandoz has agreed to pay us a price per vial equal to our cost of goods. Sandoz has agreed to use commercially reasonable efforts to market, distribute and sell the authorized generic Angiomax in the United States during the term of the agreement. Sandoz will pay us on a quarterly basis a high double digit percentage of its net profits (net sales less our cost of goods and certain agreed expenses of Sandoz) on sales of authorized generic Angiomax. The term of the agreement will continue until July 2, 2020 and will automatically renew for successive one-year periods thereafter unless either party provides notice of non-renewal at least six months prior to the end of the applicable term. Either party may terminate the agreement at any time if the other party is in material breach of the agreement and does not cure such breach within 60 days, the other party undergoes bankruptcy events, the other party is unable to perform its obligations under the agreement for more than 120 consecutive days due to a force majeure event, compliance with the agreement would violate law or net profits related to sales of the authorized generic Angiomax in any month fall below a low double digit percentage of net sales of the authorized generic Angiomax in such month. We may also terminate the agreement at any time that no other pharmaceutical product containing bivalirudin in a lyophilized form as its sole active ingredient is being sold in the United States.

On July 29, 2015, the Federal Circuit Court terminated the appeal by Mylan Pharmaceuticals, Inc., or Mylan, and our cross-appeal in the matter, related to the October 27, 2014 decision of the U.S. District Court for the Northern District of Illinois finding that Mylan’s ANDA product infringes all of the asserted claims of the ‘727 patent and that Mylan failed to prove that the same asserted claims of the ‘727 patent are invalid or unenforceable. On August 27, 2015, we filed a petition for panel rehearing of the

29



Federal Circuit Court's July 29, 2015 decision. As of November 6, 2015, the Federal Circuit Court has yet to issue a ruling on the petition.

As a result of the Federal Circuit Court's rulings Angiomax could be subject to generic competition in the United States from Mylan, Teva, APP and Sun and, if we are unsuccessful in our petition for rehearing in the Hospira matter, from the other ANDA filers upon the approval of each company's ANDA filings by the FDA. We remain in patent infringement litigation involving the '727 patent and '343 patent with Hospira and other ANDA filers, as described in Part II, Item 1. Legal Proceedings, of this quarterly report on Form 10-Q. There can be no assurance as to the outcome of our infringement litigation. We may continue to incur substantial legal expenses related to these matters.

In addition, the principal patent covering Angiomax in Europe expired in August 2015. As a result, we could face generic competition in Europe.


Business Development Activity

Annovation BioPharma, Inc. In February 2015, we completed the acquisition of Annovation BioPharma, Inc., or Annovation, and Annovation became our wholly owned subsidiary. As a result of the acquisition of Annovation, we acquired ABP-700, a novel intravenous anesthetic. Under the terms of the terms of the acquisition agreement, we paid to the holders of Annovation’s capital stock and the holders of options to purchase shares of Annovation’s capital stock, which we refer to collectively as the Annovation equityholders, an aggregate of approximately $28.4 million in cash. In addition, we may be required to pay Annovation equityholders up to an additional $26.3 million in milestone payments subsequent to the closing if we achieve certain development and regulatory approval milestones at the times and on the conditions set forth in the acquisition agreement. We have also agreed to pay Annovation equityholders a low single digit percentage of worldwide net sales, if any, of certain Annovation products, including ABP-700, during a specified earnout period. In addition, as a result of our acquisition of Annovation, we, through our subsidiary Annovation, are a party to a license agreement with The General Hospital Corporation. Under the agreement, we will be obligated to pay General Hospital Corporation up to an aggregate of $6.5 million upon achievement of specified development, regulatory and sales milestones. We will also be obligated to pay General Hospital Corporation low single-digit percentage royalties on a product-by-product and country-by-country basis based on net sales of ABP-700 products until the later of the duration of the licensed patent rights which are necessary to manufacture, use or sell ABP-700 products in a country and the date ten years from our first commercial sale of ABP-700 products in such country.

Tenaxis Medical, Inc. In May 2014, we completed our acquisition of Tenaxis Medical, Inc., or Tenaxis, and Tenaxis became our wholly owned subsidiary. As a result of the acquisition of Tenaxis, we acquired Tenaxis’s sole product, PreveLeak, a vascular and surgical sealant that mechanically seals both human tissue and artificial grafts. In the United States, PreveLeak received a premarket approval from the FDA in March 2013 for use as a vascular sealant, but it has not yet been commercialized in the United States. In the European Union, PreveLeak is approved with a European CE Mark for sale as a surgical sealant indicated for vascular, cardiac and soft tissue reconstructions to achieve hemostasis by mechanically sealing areas of leakage. Pursuant to this approval, PreveLeak has been sold in the European Union since September 2008.

Under the merger agreement, we paid to the holders of Tenaxis’s capital stock, the holders of options to purchase shares of Tenaxis’s capital stock (whether or not such capital stock or options were vested or unvested as of immediately prior to the closing) and the holders of certain warrants and side letters, which we refer to collectively as the Tenaxis equityholders, an aggregate purchase price of approximately $58.9 million in cash, subject to customary adjustments at and after the closing. At the closing, we deposited approximately $5.4 million of the purchase price into an escrow fund for the purposes of securing the indemnification obligations of the Tenaxis equityholders to us for any and all losses for which we are entitled to indemnification pursuant to the merger agreement and to provide the source of recovery for any amounts payable to us as a result of the post-closing purchase price adjustment process. During the third quarter of 2014, we finalized the purchase price adjustment process, which resulted in an insignificant adjustment to the purchase price. To the extent that any amounts remain in the escrow fund after October 1, 2015 and are not subject to claims by us, such amounts will be released to the Tenaxis equityholders, subject to certain conditions set forth in the merger agreement.

In addition, we have agreed to pay to the Tenaxis equityholders milestone payments subsequent to the closing, if we achieve certain regulatory approval milestones and commercial net sales milestones with respect to PreveLeak, at the times and on the conditions set forth in the merger agreement. In the event that all of the milestones set forth in the merger agreement are achieved in accordance with the terms of the merger agreement, we will pay the Tenaxis equityholders up to an additional $112.0 million in cash in the aggregate.

Promus PREMIER Stent System Co-Promotion. In December 2013, we entered into a co-promotion agreement with Boston

30



Scientific Corporation, or BSX, for the Promus PREMIER Everolimus‑Eluting Platinum Chromium Coronary Stent System, or Promus PREMIER Stent System, to provide promotional support for the Promus PREMIER Stent System in U.S. hospitals. For the year ended December 31, 2014, we recognized $5.0 million in co-promotion income from BSX. Effective December 31, 2014, our co-promotion agreement with BSX terminated and we ceased to co-promote the Promus PREMIER Stent System.

Rempex Pharmaceuticals, Inc. In December 2013, we completed our acquisition of Rempex Pharmaceuticals, Inc., or Rempex, and Rempex became our wholly-owned subsidiary. As a result of the transaction, we acquired Rempex's marketed product, Minocin IV, a broad-spectrum tetracycline antibiotic, and Rempex’s portfolio of product candidates, including RPX-602, a proprietary reformulation of Minocin IV utilizing magnesium sulfate, Carbavance, an investigational agent that is a combination of RPX-7009, a proprietary, novel beta-lactamase inhibitor, with a carbapenem, and Rempex's other product candidates.

Under the terms of the merger agreement for the acquisition, we paid to the holders of Rempex’s capital stock, the holders of options to purchase shares of Rempex’s capital stock and the holders of certain phantom stock units, which we collectively refer to as the Rempex equityholders, an aggregate of approximately $140.0 million in cash, plus approximately $0.3 million in purchase price adjustments.

In addition, we agreed to pay to the Rempex equityholders milestone payments subsequent to the closing, if we achieve certain development and regulatory approval milestones and commercial sales milestones with respect to Minocin IV, RPX-602, Carbavance and Rempex’s other product candidates, at the times and on the conditions set forth in the merger agreement. In the event that all of the milestones set forth in the merger agreement are achieved in accordance with the terms of the merger agreement, we will pay the Rempex equityholders an additional $214.0 million in cash in the aggregate for achieving development and regulatory milestones and an additional $120.0 million in cash in the aggregate for achieving commercial milestones, in each case, less certain transaction expenses and employer taxes owing because of the milestone payments.

Pursuant to the terms of the merger agreement, as a result of certain milestone payments becoming due within eighteen months following the closing, in October 2014, we entered into an escrow agreement and deposited an aggregate of $14.0 million into an escrow fund during the fourth quarter of 2014.  In June 2015, the escrow fund was released to the Rempex equityholders.

ProFibrix B.V. On August 5, 2013, we completed our acquisition of all of the outstanding equity of ProFibrix, pursuant to a share purchase agreement entered into with ProFibrix and its equityholders on June 4, 2013 and ProFibrix became our wholly owned subsidiary. Under the share purchase agreement, the closing of the transaction was subject to our satisfactory review of the results of the then pending FINISH-3 clinical trial, a Phase 3 clinical trial of ProFibrix's lead biologic, Raplixa. Raplixa is a dry powder topical formulation of fibrinogen and thrombin developed to help stop bleeding during surgery. In connection with entering into the agreement, we paid ProFibrix a $10.0 million option payment.
Following our review of the Phase 3 trial results on August 2, 2013, we notified ProFibrix that we wished to proceed with the consummation of the transaction. At the closing, we paid an aggregate purchase price of $90.9 million in cash. We deposited $9.0 million of the purchase price into an escrow fund for the purpose of (i) securing the indemnification obligations of the ProFibrix equityholders and optionholders to us for any and all losses for which we are entitled to indemnification under the share purchase agreement, and (ii) providing the source of recovery for any amounts payable to us as a result of the post-closing purchase price adjustment process. To the extent that any amounts remain in the escrow fund after December 4, 2015 and not subject to claims by us, such amounts will be released to the ProFibrix equityholders, subject to certain conditions set forth in the merger agreement.
Under the terms of the share purchase agreement, we agreed to pay up to an aggregate of $140.0 million in cash to the ProFibrix equityholders and optionholders upon the achievement of certain U.S. and European regulatory approvals prior to January 1, 2016 and certain U.S. and European sales milestones during the 24-month period that follows the initial commercial sale of Raplixa. As a result of our acquisition of ProFibrix, we acquired a portfolio of patents and patent applications, including patents licensed from Quadrant Drug Delivery Limited, or Quadrant, which included the U.S. patent directed to the composition of matter of Raplixa. Under the terms of a license agreement between ProFibrix and Quadrant, we are required to pay low single digit percentage royalties based on annual worldwide net sales of licensed products, including Raplixa, by us or our affiliates and sublicensees. The royalties are subject to reduction in specified circumstances.

Alnylam License Agreement. In February 2013, we entered into a license and collaboration agreement with Alnylam to develop, manufacture and commercialize therapeutic products targeting the human PCSK-9 gene based on certain of Alnylam's RNAi technology. Under the terms of the agreement, we obtained the exclusive, worldwide right under Alnylam's technology to develop, manufacture and commercialize PCSK-9 products for the treatment, palliation and/or prevention of all human diseases. We paid Alnylam $25.0 million in an initial license payment and agreed to pay up to $180.0 million in success-based development, regulatory and commercialization milestones. In addition, Alnylam will be eligible to receive scaled double-digit royalties based on annual worldwide net sales of PCSK-9 products by us or our affiliates and sublicensees. Royalties to Alnylam are payable on a product-by-product and country-by-country basis until the last to occur of the expiration of patent rights in the applicable country that

31



cover the applicable product, the expiration of non-patent regulatory exclusivities for such product in such country, and the twelfth anniversary of the first commercial sale of the product in such country. The royalties are subject to reduction in specified circumstances. We are also responsible for paying royalties, and in some cases milestone payments, owed by Alnylam to its licensors with respect to intellectual property covering these products.
Recothrom. In February 2013, pursuant to a master transaction agreement with Bristol-Myers Squibb Company, or BMS, we acquired the right to sell, distribute and market Recothrom on a global basis for a two-year period, which we refer to as the collaboration term, and certain limited assets exclusively related to Recothrom, primarily the biologics license application for Recothrom and certain related regulatory assets. BMS also granted to us, under the master transaction agreement, an option to purchase from BMS and its affiliates, following the expiration or earlier termination of the collaboration term, certain other assets, including certain patent and trademark rights, contracts, inventory, equipment and related books and records, held by BMS which are exclusively related to Recothrom. Pursuant to the agreement, we exercised our option and on February 6, 2015 we completed our acquisition of the remaining assets held by BMS which are exclusively related to Recothrom.
Under the master transaction agreement, in February 2013 we paid to BMS a one-time collaboration fee equal to $105.0 million and a one-time option fee equal to $10.0 million. Upon closing the exercise of the option, in February 2015 we paid BMS approximately $127.7 million in the aggregate, including approximately $39.3 million for inventory. In March 2015, we paid BMS $4.7 million upon the delivery of certain additional inventory following the closing.
We did not assume any pre-existing liabilities related to the Recothrom business, contingent or otherwise, arising prior to the collaboration period, and we did not acquire any significant tangible assets related to the Recothrom business, other than inventory. Under the master transaction agreement, we paid BMS quarterly tiered royalty payments during the two-year collaboration term equal to a percentage of worldwide net sales of Recothrom.
Incline Therapeutics, Inc. In January 2013, we acquired Incline Therapeutics, Inc., or Incline, a company focused on the development of Ionsys, a compact, disposable, needleless patient-controlled system for the short-term management of acute postoperative pain in the hospital setting.

Under the terms of our merger agreement with Incline, we paid to Incline's equityholders and optionholders an aggregate of approximately $155.2 million in cash. In addition, we paid approximately $13.0 million to Cadence Pharmaceuticals, Inc., or Cadence, to terminate Cadence's option to acquire Incline pursuant to an agreement between Cadence and Incline and deposited an additional $18.5 million in cash into an escrow fund for the purposes of securing the indemnification obligations of the Incline equityholders to us for any and all losses for which we are entitled to indemnification pursuant to the merger agreement and to provide the source of recovery for any amounts payable to us as a result of the post-closing purchase price adjustment process. Under the merger agreement, to the extent that any amounts remained in the escrow fund after July 4, 2014 and not subject to claims by us, such amounts were to be released to Incline's equityholders and optionholders, subject to certain conditions set forth in the merger agreement. In December 2014, we entered into a settlement and amendment to the merger agreement, which resulted in revisions to certain milestone triggers, a reduction in total potential milestone payments and the immediate release of the escrow fund to us.

Under the terms of our agreement with Incline, as amended, we agreed to pay up to $189.3 million in cash in the aggregate, less certain related expenses, to Incline's former equityholders and optionholders and up to $115.5 million in additional payments to other third parties, if we enter into a license agreement in Japan or achieve certain regulatory approval or sales milestones with respect to Ionsys.

Collaboration with AstraZeneca. On April 25, 2012, we entered into a global collaboration agreement with AstraZeneca LP, or AstraZeneca, pursuant to which we and AstraZeneca agreed to collaborate globally to develop and commercialize certain acute ischemic heart disease compounds. For the year ended December 31, 2014, AstraZeneca LP paid us $16.0 million under the agreement. Effective December 31, 2014, our global collaboration agreement with AstraZeneca LP was terminated and we ceased to co-promote AstraZeneca LP's BRILINTA.

Targanta Therapeutics Corporation. In February 2009, we acquired Targanta Therapeutics Corporation, or Targanta, a biopharmaceutical company focused on developing and commercializing innovative antibiotics to treat serious infections in the hospital and other institutional settings.

Under the terms of our agreement with Targanta, we paid Targanta shareholders an aggregate of approximately $42.0 million in cash at closing. In addition, we originally agreed to pay contingent cash payments up to an additional $90.4 million in the aggregate. This amount has been reduced to $49.4 million as certain milestones have not been achieved by specified dates. We will owe $49.4 million if aggregate net sales of Orbactiv in four consecutive calendar quarters ending on or before December 31, 2021 reach or exceed $400.0 million, and up to an additional $40.0 million in additional payments to other third parties.

32




BARDA Agreement

In February 2014, our subsidiary Rempex entered into an agreement with the Biomedical Advanced Research and Development Authority, or BARDA, of the U.S. Department of Health and Human Services, under which Rempex has the potential to receive up to $89.8 million in funding to support the development of Carbavance. The BARDA agreement is a cost-sharing arrangement that consists of an initial base period and seven option periods that BARDA may exercise in its sole discretion pursuant to the BARDA agreement. The BARDA agreement provides for an initial commitment by BARDA of an aggregate of $19.8 million for the initial base period and the first option period, and up to an additional $70.0 million if the remaining six option periods are exercised by BARDA. In October 2014, BARDA exercised the second option, increasing BARDA's total commitment to $37.8 million. In September 2015, BARDA exercised the third option, increasing BARDA's total commitment to $53.8 million. Under the cost-sharing arrangement, Rempex will be responsible for a designated portion of the costs associated with each period of work. If all option periods are exercised by BARDA, the estimated period of performance would be extended until approximately July 31, 2019. BARDA is entitled to terminate the agreement, including the projects under the BARDA agreement for convenience, in whole or in part, at any time and is not obligated to provide continued funding beyond current year amounts from Congressionally approved annual appropriations. We expect to use the total award under the BARDA agreement to support non-clinical development activities, clinical studies, manufacturing and associated regulatory activities designed to obtain marketing approval of Carbavance in the United States for treatment of serious gram-negative infections. The BARDA agreement also covers initial non-clinical studies to assess the potential usefulness of Carbavance for treatment of certain gram-negative bioterrorism agents. Under the terms of our agreement with Rempex, we agreed to pay Rempex equityholders on a quarterly basis, as part of our development milestones, a specified percentage of amounts actually received by us from BARDA. We recorded approximately $8.7 million and $14.2 million of reimbursements by the government as a reduction of research and development expenses for the three and nine months ended September 30, 2015.

Convertible Senior Note Offerings

2022 Notes
On January 13, 2015, we completed our private offering of $400.0 million aggregate principal amount of our 2.50% convertible senior notes due 2022, or the 2022 notes, and entered into an indenture with Wells Fargo Bank, National Association, a national banking association, as trustee, governing the 2022 notes. The aggregate principal amount of 2022 notes sold reflects the exercise in full by the initial purchasers of the 2022 notes of their option to purchase up to an additional $50.0 million in aggregate principal amount of the 2022 notes. The net proceeds from the offering were $387.2 million, after deducting the initial purchasers' discounts and commissions and our offering expenses.
The 2022 notes bear cash interest at a rate of 2.50% per year, payable semi-annually on January 15 and July 15 of each year, beginning on July 15, 2015. The 2022 notes will mature on January 15, 2022. The 2022 notes do not contain any financial or operating covenants or any restrictions on the payment of dividends, incurrence of other indebtedness, or issuance or repurchase of securities by us.
Holders may convert their 2022 notes at their option at any time prior to the close of business on the business day immediately preceding October 15, 2021 only under the following circumstances: (1) during any calendar quarter commencing on or after March 31, 2015 (and only during such calendar quarter), if the last reported sale price of our common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day; (2) during the five business day period after any five consecutive trading day period, or measurement period, in which the trading price, as defined in the indenture governing the 2022 notes, per $1,000 principal amount of 2022 notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of our common stock and the conversion rate on each such trading day; (3) during any period after we have issued notice of redemption until the close of business on the scheduled trading day immediately preceding the relevant redemption date; or (4) upon the occurrence of specified corporate events. On or after October 15, 2021, until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert their 2022 notes at any time, regardless of the foregoing circumstances. Upon conversion, we will pay cash up to the aggregate principal amount of the 2022 notes to be converted and deliver shares of our common stock in respect of the remainder, if any, of its conversion obligation in excess of the aggregate principal amount of 2022 notes being converted, subject to a daily share cap, as described in the indenture governing the 2022 notes. Holders of 2022 notes will not receive any additional cash payment or additional shares representing accrued and unpaid interest, if any, upon conversion of a note, except in limited circumstances. Instead, accrued but unpaid interest will be deemed to be paid by the cash and shares, if any, of our common stock, together with any cash payment for any fractional share, paid or delivered, as the case may be, upon conversion of a 2022 note.

33



The conversion rate for the 2022 notes was initially, and remains, 29.8806 shares of our common stock per $1,000 principal amount of the 2022 notes, which is equivalent to an initial conversion price of approximately $33.47 per share of our common stock. The conversion rate and the conversion price are subject to customary adjustments for certain events, including, but not limited to, the issuance of certain stock dividends on our common stock, the issuance of certain rights or warrants, subdivisions, combinations, distributions of capital stock, indebtedness, or assets, cash dividends and certain issuer tender or exchange offers, as described in the indenture governing the 2022 notes.
We may not redeem the 2022 notes prior to January 15, 2019. We may redeem for cash all or any portion of the 2022 notes, at our option, on or after January 15, 2019 if the last reported sale price of our common stock has been at least 130% of the conversion price then in effect on the last trading day of, and for at least 19 other trading days (whether or not consecutive) during, any 30 consecutive trading day period ending on, and including, the trading day immediately preceding the date on which we provides notice of redemption, at a redemption price equal to 100% of the principal amount of the 2022 notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date. No sinking fund is provided for the 2022 notes, which means that we are not required to redeem or retire the 2022 notes periodically.
If we undergo a fundamental change, as defined in the indenture governing the 2022 notes, subject to certain conditions, holders of the 2022 notes may require us to repurchase for cash all or part of their 2022 notes at a repurchase price equal to 100% of the principal amount of the 2022 notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date. Following certain corporate transactions that constitute a change of control, we would increase the conversion rate for a holder who elects to convert the 2022 notes in connection with such change of control in certain circumstances.
The 2022 notes are our senior unsecured obligations and will rank senior in right of payment to our future indebtedness that is expressly subordinated in right of payment to the 2022 notes; equal in right of payment to our existing and future unsecured indebtedness that is not so subordinated (including the 2017 notes); effectively junior in right of payment to any of our secured indebtedness to the extent of the value of the assets securing such indebtedness; and structurally junior to all existing and future indebtedness and other liabilities (including trade payables) incurred by our subsidiaries.
The indenture governing the 2022 notes contains customary events of default with respect to the 2022 notes, including that upon certain events of default (including our failure to make any payment of principal or interest on the 2022 notes when due and payable) occurring and continuing, the trustee for the 2022 notes by notice to us, or the holders of at least 25% in principal amount of the outstanding 2022 notes by notice to us and the trustee for the 2022 notes, may, and the trustee at the request of such holders (subject to the provisions of the indenture governing the 2022 notes) shall, declare 100% of the principal of and accrued and unpaid interest, if any, on all the 2022 notes to be due and payable. In case of certain events of bankruptcy, insolvency or reorganization, involving us or a significant subsidiary, 100% of the principal of and accrued and unpaid interest on the 2022 notes will automatically become due and payable. Upon such a declaration of acceleration, such principal and accrued and unpaid interest, if any, will be due and payable immediately.
2017 Notes
On June 11, 2012, we completed our private offering of $275.0 million aggregate principal amount of our 1.375% convertible senior notes due 2017, or the 2017 notes, and entered into an indenture with Wells Fargo Bank, National Association, a national banking association, as trustee, governing the 2017 notes. The net proceeds from the offering were $266.2 million, after deducting the initial purchasers' discounts and commissions and our offering expenses.
The 2017 notes bear cash interest at a rate of 1.375% per year, payable semi-annually on June 1 and December 1 of each year. The 2017 notes will mature on June 1, 2017. The 2017 notes do not contain any financial or operating covenants or any restrictions on the payment of dividends, the incurrence of other indebtedness, or the issuance or repurchase of securities by us.
Holders may convert their 2017 notes at their option at any time prior to the close of business on the business day immediately preceding March 1, 2017 only under the following circumstances: (1) during any calendar quarter commencing on or after September 1, 2012 (and only during such calendar quarter), if the last reported sale price of our common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day; (2) during the five business day period after any five consecutive trading day period, or measurement period, in which the trading price, as defined in the indenture governing the 2017 notes, per $1,000 principal amount of 2017 notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of our common stock and the conversion rate on each such trading day; or (3) upon the occurrence of specified corporate events. The conditional conversion feature of the 2017 notes has been triggered and the holders are currently entitled to convert the notes into our common stock through December 31, 2015 pursuant to the terms of the 2017 notes indenture. Additionally, on or after March 1, 2017, until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert their 2017 notes at any time, regardless of the foregoing circumstances. Upon conversion, we will pay cash up to the aggregate principal amount of the 2017 notes to be converted and deliver shares of our common stock in respect of the remainder, if any, of our conversion obligation in excess of

34



the aggregate principal amount of the 2017 notes being converted, subject to a daily share cap, as described in the indenture governing the 2017 notes. Holders of 2017 notes will not receive any additional cash payment or additional shares representing accrued and unpaid interest, if any, upon conversion of a note, except in limited circumstances. Instead, accrued but unpaid interest will be deemed to be paid by the cash and shares, if any, of our common stock, together with any cash payment for any fractional share, paid or delivered, as the case may be, upon conversion of a 2017 note.
The conversion rate for the 2017 notes was initially, and remains, 35.8038 shares of our common stock per $1,000 principal amount of 2017 notes, which is equivalent to an initial conversion price of $27.93 per share of our common stock. The conversion rate and the conversion price are subject to customary adjustments for certain events, including, but not limited to, the issuance of certain stock dividends on our common stock, the issuance of certain rights or warrants, subdivisions, combinations, distributions of capital stock, indebtedness, or assets, cash dividends and certain issuer tender or exchange offers, as described in the indenture governing the 2017 notes.
We may not redeem the 2017 notes prior to maturity and are not required to redeem or retire the 2017 notes periodically. However, upon the occurrence of a "fundamental change", as defined in the indenture governing the 2017 notes, subject to certain conditions, in lieu of converting their 2017 notes, holders may require us to repurchase for cash all or part of their 2017 notes at a repurchase price equal to 100% of the principal amount of the 2017 notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date. Following certain corporate transactions that constitute a change of control, we will increase the conversion rate for a holder who elects to convert the 2017 notes in connection with such change of control in certain circumstances.
The 2017 notes are our senior unsecured obligations and will rank senior in right of payment to our future indebtedness, if any, that is expressly subordinated in right of payment to the 2017 notes and equal in right of payment to our existing and future unsecured indebtedness that is not so subordinated (including the 2022 notes). The 2017 notes are effectively junior in right of payment to any of our secured indebtedness to the extent of the value of the assets securing such indebtedness and are structurally junior to all existing and future indebtedness and other liabilities, including trade payables, incurred by our subsidiaries.